<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 14, 1998
REGISTRATION STATEMENT NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ENGINEERING ANIMATION, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 7372 42-1323712
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
2321 NORTH LOOP DRIVE, AMES, IOWA 50010 (515) 296-9908
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
JAMIE A. WADE
VICE PRESIDENT OF ADMINISTRATION,
GENERAL COUNSEL AND SECRETARY
2321 NORTH LOOP DRIVE
AMES, IOWA 50010
(515) 296-6942
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE, INCLUDING AREA CODE, OF AGENT
FOR SERVICE)
------------------------
with copies to:
<TABLE>
<S> <C>
GEORGE C. MCKANN HENRY J. BRENNAN
GARDNER, CARTON & DOUGLAS TIMMIS & INMAN
321 NORTH CLARK STREET, 300 TALON CENTRE DRIVE
SUITE 3400 DETROIT, MICHIGAN 48207
CHICAGO, ILLINOIS 60610 (313) 396-4200
(312) 245-8460
</TABLE>
------------------------
Approximate date of commencement of proposed sale of the securities to the
public: Upon the Effective Time of the Merger of Variation Systems Analysis,
Inc. ("VSA") with and into EAI Victory, Inc., a Michigan corporation and a
wholly owned subsidiary of Engineering Animation, Inc. ("Sub"), as set forth in
Article I of the Amended and Restated Agreement and Plan of Merger included as
Appendix A to the Information Statement/Prospectus forming a part of this
Registration Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, please check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER UNIT OFFERING PRICE FEE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.01 par
value........................ 421,736 shares $2.08(1) $876,329.00(1) $259.00
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) There is no market for the shares of VSA that are to be received by the
registrant in the Merger. Therefore pursuant to Rule 457(f)(2), the fee is
calculated based on the aggregate book value of such shares, which was
$876,329.00 as of June 30, 1998.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
VARIATION SYSTEMS ANALYSIS, INC.
300 MAPLE PARK BOULEVARD
ST. CLAIR SHORES, MICHIGAN 48081-3771
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD SEPTEMBER , 1998
A Special Meeting of the shareholders of Variation Systems Analysis, Inc.,
a Michigan corporation ("VSA"), will be held on September , 1998 at 9:00 a.m.,
Eastern Time, at VSA's offices, 300 Maple Park Boulevard, St. Clair Shores,
Michigan to consider and act upon:
(1) A proposal to approve and adopt an Amended and Restated Agreement
and Plan of Merger dated as of August 5, 1998 among Engineering Animation,
Inc., a Delaware corporation ("EAI"), EAI Victory, Inc., a Michigan
corporation and a wholly owned subsidiary of EAI ("Sub"), and VSA, pursuant
to which Sub will be merged with and into VSA, as more fully described in
the attached Information Statement/Prospectus (the "Merger"); and
(2) Such other business as may properly come before the meeting or any
adjournments thereof.
The Board of Directors has fixed the close of business on August 14, 1998
as the record date for the determination of shareholders entitled to notice of,
and to vote at, the meeting.
August , 1998
By order of the Board of Directors
Mark Craig, Secretary
WE ARE NOT ASKING FOR A PROXY AND YOU ARE REQUESTED
NOT TO SEND US A PROXY
<PAGE> 3
VARIATION SYSTEMS ANALYSIS, INC.
INFORMATION STATEMENT
------------------------
ENGINEERING ANIMATION, INC.
PROSPECTUS
------------------------
This Information Statement/Prospectus and the accompanying notice and other
documents are being sent to shareholders of Variation Systems Analysis, Inc., a
Michigan corporation ("VSA"), on or about August , 1998 in connection with a
Special Meeting of Shareholders of VSA (the "Meeting"). The Meeting will be held
at the offices of VSA, 300 Maple Park Boulevard, St. Clair Shores, Michigan on
September , 1998 at 9:00 a.m. Eastern Time.
The purpose of the Meeting is for the shareholders of VSA to consider and
vote on the proposed merger of EAI Victory, Inc., a Michigan corporation ("Sub")
and a wholly owned subsidiary of Engineering Animation, Inc., a Delaware
corporation ("EAI"), with and into VSA (the "Merger") pursuant to the Amended
and Restated Agreement and Plan of Merger among EAI, Sub and VSA dated as of
August 5, 1998 (the "Merger Agreement"). See "The Merger." At the Effective Time
(as defined herein) of the Merger, all of the outstanding shares of VSA common
stock, par value $1.00 per share, will be converted into the right to receive a
number of whole shares of EAI common stock, par value $0.01 per share (the "EAI
Common Stock"), plus cash in lieu of fractional shares based upon the Exchange
Ratio (as defined herein). See "The Merger."
------------------------
The information herein with respect to EAI, Sub and VSA has been supplied
by each corporation. The information contained herein with respect to the Merger
is qualified by reference to the Merger Agreement, which is incorporated herein
by reference.
The EAI Common Stock is listed and traded on the Nasdaq Stock Market
National Market under the symbol "EAII."
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR CERTAIN INFORMATION THAT SHOULD
BE CONSIDERED BY VSA SHAREHOLDERS IN CONNECTION WITH THE MERGER.
THE SECURITIES TO WHICH THIS INFORMATION STATEMENT/PROSPECTUS RELATES HAVE
NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS INFORMATION
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The date of this Information Statement/Prospectus is August , 1998.
<PAGE> 4
AVAILABLE INFORMATION
EAI is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files
reports, proxy statements and other information with the Securities and Exchange
Commission (the "Commission"). Such reports, proxy statements and other
information can be inspected and copied at the public reference facilities
maintained by the Commission (Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549) and at the following regional offices: New York
Regional Office, Seven World Trade Center, New York, New York 10048; and Chicago
Regional Office, Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such materials can be obtained from the Public
Reference Section of the Commission, Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and its public reference facilities in New
York, New York and Chicago, Illinois, at prescribed rates. The EAI Common Stock
is traded on the Nasdaq Stock Market National Market. Reports, proxy statements
and other information regarding EAI may also be inspected at the offices of the
NASD, Reports Section, 1735 K Street, N.W., Washington, D.C. 20006. In addition,
electronically filed documents, including reports, proxy and information
statements and other information regarding EAI, can be obtained from the
Commission's Web site at http://www.sec.gov.
EAI has filed with the Commission a Registration Statement under the
Securities Act of 1933, as amended (the "Securities Act"), covering the shares
of EAI's Common Stock referred to herein. This Information Statement/Prospectus
does not contain all of the information set forth in the Registration Statement,
certain parts of which are omitted in accordance with the rules and regulations
of the Commission. For further information, reference is made to the
Registration Statement.
ii
<PAGE> 5
DOCUMENTS INCORPORATED BY REFERENCE
The following documents filed by EAI with the Commission (File No. 0-27670)
are incorporated in this Information Statement/Prospectus by reference and made
a part hereof:
(i) Annual Report on form 10-K for the fiscal year ended December 31,
1997;
(ii) Amendment to Annual Report on Form 10-K/A for the fiscal year
ended December 31, 1997;
(iii) Quarterly Reports on Form 10-Q for the quarters ended March 31,
1998 and June 30, 1998; and
(iv) Current Reports on Form 8-K, filed March 19, 1998 and July 1,
1998 (as amended July 31, 1998).
All documents subsequently filed by EAI pursuant to Sections 13(a), 13(c),
14 or 15(d) of the Exchange Act after the date of this Information
Statement/Prospectus and prior to the Merger shall be deemed to be incorporated
in this Information Statement/Prospectus by reference and to be a part hereof
from the respective dates of filing of such documents. Any statement contained
in a document incorporated or deemed to be incorporated by reference in this
Information Statement/Prospectus shall be deemed to be modified or superseded
for purposes of this Information Statement/Prospectus to the extent that a
statement contained in this Information Statement/Prospectus or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference in this Information Statement/Prospectus modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this Information
Statement/Prospectus. All information appearing in this Information
Statement/Prospectus is qualified in its entirety by the information and
financial statements (including the notes thereto) appearing in the documents
incorporated herein by reference.
AS DESCRIBED ABOVE, THIS INFORMATION STATEMENT/PROSPECTUS INCORPORATES BY
REFERENCE THE DOCUMENTS LISTED ABOVE, THE EXHIBITS TO WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. THESE EXHIBITS ARE AVAILABLE WITHOUT CHARGE UPON
REQUEST DIRECTED TO MR. JAMIE A. WADE, VICE PRESIDENT OF ADMINISTRATION, GENERAL
COUNSEL AND SECRETARY, ENGINEERING ANIMATION, INC., 2321 NORTH LOOP DRIVE, AMES,
IOWA 50010; TELEPHONE (515) 296-6942. IN ORDER TO ENSURE TIMELY DELIVERY OF THE
DOCUMENTS, ANY REQUEST SHOULD BE MADE BEFORE SEPTEMBER , 1998.
iii
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY..................................................... 1
SUMMARY SELECTED FINANCIAL INFORMATION AND PER SHARE DATA... 4
RISK FACTORS................................................ 10
THE SPECIAL MEETING OF THE VSA SHAREHOLDERS................. 15
Date, Time and Place...................................... 15
Purpose of the Meeting.................................... 15
Record Date............................................... 15
Required Vote............................................. 15
THE MERGER.................................................. 16
Background of the Merger.................................. 16
VSA's Reasons for the Merger; Recommendation of the VSA
Board.................................................. 16
EAI's Reasons for the Merger.............................. 17
Merger Consideration...................................... 18
Effective Time of the Merger.............................. 18
Conversion of Shares in the Merger........................ 18
Exchange of Certificates.................................. 18
Representations and Warranties............................ 19
Conduct of Business Pending Consummation of the Merger.... 19
Conditions to Closing..................................... 20
Termination and Termination Fee........................... 21
No Solicitations.......................................... 22
Indemnification........................................... 23
Interests of Certain Persons in the Merger................ 23
Employment Agreement...................................... 23
Registration and Listing.................................. 24
The ESOP.................................................. 24
ESOP Trustee.............................................. 24
ESOP Evaluation........................................... 24
Certain Federal Income Tax Consequences................... 24
Accounting Treatment...................................... 27
Regulatory Approvals...................................... 27
Resale of EAI Common Stock Issued in the Merger;
Affiliates............................................. 27
INFORMATION FOR ESOP PARTICIPANTS........................... 28
ESOP Participants Eligible To Instruct the ESOP Trustee... 28
Effect of ESOP Participants' Instructions................. 28
The ESOP Trustee's Fiduciary Obligations.................. 28
How To Instruct the ESOP Trustee.......................... 29
Failure To Sign, Complete or Return an ESOP Voting
Instruction Card....................................... 29
Confidentiality........................................... 30
EAI COMPARATIVE PER SHARE PRICES AND DIVIDEND POLICY........ 30
DIVIDEND POLICY............................................. 30
INFORMATION CONCERNING EAI AND SUB.......................... 30
INFORMATION CONCERNING VSA.................................. 31
Industry Background....................................... 31
Products and Services..................................... 32
Customers Marketing and Sales............................. 32
Employees................................................. 32
</TABLE>
iv
<PAGE> 7
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Market for Shares and Dividends........................... 32
Security Ownership........................................ 32
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 33
Market Risk............................................... 34
Certain Transactions...................................... 34
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
STATEMENTS................................................ 35
RIGHTS OF EAI STOCKHOLDERS AND VSA SHAREHOLDERS............. 42
Description of EAI Stock.................................. 42
Description of VSA Capital Stock.......................... 43
Comparison of Rights of EAI Stockholders and VSA
Shareholders........................................... 43
LEGAL MATTERS............................................... 47
TAX OPINION................................................. 48
EXPERTS..................................................... 48
EAI....................................................... 48
VSA....................................................... 48
INDEX TO VSA FINANCIAL STATEMENTS........................... F-1
</TABLE>
APPENDIX A -- MERGER AGREEMENT
v
<PAGE> 8
SUMMARY
The following summary is not intended to be complete and is qualified in
its entirety by more detailed information appearing elsewhere in this
Information Statement/Prospectus, including the appendices hereto, or in the
documents incorporated herein by reference. Unless otherwise indicated, all
references in this Information Statement/Prospectus to EAI include Engineering
Animation, Inc. and its subsidiaries. This Information Statement/Prospectus,
including the appendices and the documents incorporated by reference, should be
read carefully in their entirety.
ENGINEERING ANIMATION, INC.
Engineering Animation, Inc., a Delaware corporation ("EAI"), develops,
produces and sells product visualization software and interactive multimedia
products that address the needs of its customers in domestic and international
commercial markets. EAI's principal executive office is located at 2321 North
Loop Drive, Ames, Iowa 50010; its telephone number is (515) 296-9908; its
Internet e-mail address is [email protected]; and its World Wide Web address is
www.eai.com. See "Information Concerning EAI and Sub."
EAI VICTORY, INC.
EAI Victory, Inc., a Michigan corporation and a wholly owned subsidiary of
EAI ("Sub"), was incorporated in July 1998 solely for the purpose of completing
the transactions contemplated by the Merger Agreement (as defined herein). Sub
engages in no other business. The mailing address of Sub's principal executive
offices is c/o Engineering Animation, Inc., 2321 North Loop Drive, Ames, Iowa
50010, and its telephone number is (515) 296-9908.
VARIATION SYSTEMS ANALYSIS, INC.
Variation Systems Analysis, Inc., a Michigan corporation ("VSA"), is
dedicated to dimensional management consulting, software development, training,
and support. VSA develops, produces, and sells a line of products for 3D
simulation of manufacturing and assembly variation in the digital manufacturing
environment. VSA's principal executive office is located at 300 Maple Park
Boulevard, St. Clair Shores, Michigan, 48081, and its telephone number is (810)
774-2640. See "Information Concerning VSA."
DATE, TIME AND PLACE OF VSA SHAREHOLDERS' MEETING
A special meeting of VSA's shareholders (the "Meeting") to consider and
vote upon a proposal to authorize the transactions contemplated by an Amended
and Restated Agreement and Plan of Merger dated as of August 5, 1998 (the
"Merger Agreement") among EAI, Sub and VSA will be held on September , 1998 at
the offices of VSA located at 300 Maple Park Boulevard, St. Clair Shores,
Michigan, 48081, at 9:00 a.m., Eastern Time. See "The Special Meeting of the VSA
Shareholders." Pursuant to the Merger Agreement, Sub will merge with and into
VSA (the "Merger") and, as the surviving corporation, VSA will be a wholly owned
subsidiary of EAI.
RECORD DATE
Only holders of record of VSA common stock, par value $1.00 per share (the
"VSA Common Stock"), at the close of business on August 14, 1998 (the "Record
Date") are entitled to vote at the Meeting. At the close of business on the
Record Date, there were 69,970 shares of VSA Common Stock outstanding, each of
which is entitled to one vote at the Meeting. See "The Special Meeting of the
VSA Shareholders -- Record Date."
REQUIRED VOTE
The representation in person or by proxy of at least a majority of the
issued and outstanding shares of VSA Common Stock is necessary to establish a
quorum for the transaction of business at the Meeting. According to the Michigan
Business Corporation Act, as amended (the "MBCA"), the affirmative vote of a
1
<PAGE> 9
majority of the outstanding shares of the VSA Common Stock is necessary to
approve the Merger Agreement. See "The Special Meeting of the VSA Shareholders
- -- Required Vote." Directors and executive officers of VSA and their affiliates
beneficially own 90% of the issued and outstanding shares of VSA Common Stock.
See "Information Concerning VSA -- Security Ownership."
The consent of the stockholders of EAI is not required to approve the
Merger or the Merger Agreement and will not be sought.
THE MERGER
Upon the terms and subject to the conditions contained in the Merger
Agreement, at the Effective Time (as defined below), (i) Sub will be merged with
and into VSA, (ii) each outstanding share of VSA Common Stock (other than shares
to be canceled pursuant to clause (iii) below) will be converted into the right
to receive that number of shares of EAI common stock, par value $0.01 per share
(the "EAI Common Stock"), equal to the Exchange Ratio (as defined below), and
(iii) each share of VSA Common Stock owned by VSA as treasury shares or owned
directly or indirectly by VSA, EAI or a wholly owned subsidiary of EAI will be
canceled and will cease to exist, and no stock of EAI or other consideration
will be delivered in exchange therefor. See "The Merger -- Merger
Consideration."
Pursuant to the Merger Agreement, the exchange ratio in the Merger (the
"Exchange Ratio") will be determined as follows: each share of VSA Common Stock
shall be exchanged for that number of shares of EAI Common Stock equal to the
quotient of (x) the number obtained by dividing (i) $26,000,000 by (ii) the
total number of shares of VSA Common Stock outstanding immediately prior to the
Effective Time, divided by (y) the EAI Stock Value (which was $61.65). Based on
the number of shares of VSA Common Stock currently expected to be outstanding at
the Effective Time, the Exchange Ratio will be 5.740399. See "The Merger --
Merger Consideration."
EAI will issue only whole shares of EAI Common Stock in connection with the
Merger. Each holder of VSA Common Stock who otherwise would be entitled to
receive a fractional share of EAI Common Stock will instead receive an amount of
cash (without interest) determined by multiplying the EAI Stock Value by the
fractional share interest to which such holder would otherwise be entitled. See
"The Merger -- Exchange of Certificates."
APPROVAL OF THE MERGER
The Boards of Directors of EAI and VSA have unanimously approved the
consummation of the Merger and the transactions contemplated by the Merger
Agreement. See "The Merger -- Background of the Merger."
EFFECTIVE TIME OF THE MERGER
"Effective Time" shall mean the time at which the Merger becomes effective.
The Merger will become effective upon the filing of the required merger
documents with the Secretary of State of Michigan, which Sub and VSA expect will
occur on the date of the Closing.
CONDITIONS TO THE MERGER; TERMINATION
The consummation of the Merger is conditioned upon the fulfillment of
certain conditions set forth in the Merger Agreement. The Merger Agreement may
be terminated by mutual consent of the Boards of Directors of VSA and EAI, by
either EAI or VSA if certain conditions have not been satisfied, and in certain
other situations. If VSA terminates the Merger Agreement under certain
circumstances, it will be required to make certain payments to EAI and may be
required to make certain additional payments if it consummates or agrees to
consummate certain types of transactions within the 12-month period following
such termination. See "The Merger -- Conditions to Closing," and "-- Termination
and Termination Fee."
2
<PAGE> 10
REGULATORY APPROVALS
EAI and VSA are aware of no governmental or regulatory approvals required
for consummation of the Merger, other than compliance with applicable securities
laws.
OTHER NEGOTIATIONS
The Merger Agreement places certain restrictions on the extent to which VSA
can negotiate with prospective purchasers other than EAI. See "The Merger -- No
Solicitations."
FEDERAL INCOME TAX CONSEQUENCES
The Merger is intended to qualify as a tax-free reorganization within the
meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended.
Tax-free treatment of the Merger for EAI and the VSA shareholders will depend in
part on circumstances occurring after the Merger. For a discussion of the
possible federal income tax consequences of the Merger, see "The Merger --
Certain Federal Income Tax Consequences."
RESALE RESTRICTIONS
All shares of EAI Common Stock received by VSA shareholders in connection
with the Merger will be fully transferable, except that shares of EAI Common
Stock received by persons who are deemed to be "affiliates" (as that term is
defined for purposes of Rule 145 under the Securities Act of 1933, as amended
(the "Securities Act")) of VSA at the Effective Time may be resold by such
person only in certain circumstances. See "The Merger -- Resale of EAI Common
Stock Issued in the Merger; Affiliates."
3
<PAGE> 11
SUMMARY SELECTED FINANCIAL INFORMATION
AND PER SHARE DATA
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following selected historical consolidated financial data of EAI for
the years ended December 31, 1997, 1996 and 1995 and as of December 31, 1997 and
1996 have been derived from audited consolidated financial statements and the
notes thereto incorporated by reference. The financial data for the years ended
December 31, 1994 and 1993 and as of December 31, 1995, 1994 and 1993 have been
derived from audited consolidated financial statements which are not included or
incorporated herein by reference. The EAI historical financial data as of June
30, 1998 and 1997 have been derived from unaudited consolidated financial
statements of EAI and have been prepared on the same basis as the historical
information derived from audited financial statements. In the opinion of the
management of EAI, the unaudited financial statements of EAI from which such
data have been derived contain all adjustments, consisting only of normal
recurring accruals necessary for the fair presentation of the results for, and
as of the end of, such periods. The following selected historical financial data
of VSA for the years ended June 30, 1998 and 1997 and as of June 30, 1998 and
1997 have been derived from audited financial statements and the notes thereto
included herein. The financial data of VSA for the years ended June 30, 1996,
1995 and 1994 and as of June 30, 1996, 1995 and 1994 have been derived from
unaudited financial statements and have been prepared on the same basis as the
historical financial information derived from the audited financial statements.
In the opinion of management of VSA, the unaudited financial statements of VSA
from which such data have been derived contain all adjustments, consisting only
of normal recurring accruals, necessary for the fair presentation of the results
for and as of the end of such period.
EAI SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
YEAR ENDED DECEMBER 31 (UNAUDITED)
--------------------------------------------- -----------------
1997 1996 1995 1994 1993 1998 1997
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues........................... $49,717 $27,189 $12,249 $6,324 $3,263 $33,711 $20,794
Income (loss) from operations.......... (398) 3,634 (1,212) 268 206 (6,993) 2,975
Net income (loss)...................... (1,697) 2,567 (1,890) 103 109 (7,099) 2,105
Earnings (loss) per share.............. $ (0.19) $ 0.30 $ (0.39) $ 0.02 $ 0.03 $ (0.71) $ 0.23
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30
YEAR ENDED DECEMBER 31 (UNAUDITED)
--------------------------------------------- -----------------
1997 1996 1995 1994 1993 1998 1997
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets........................... $80,502 $42,299 $ 8,191 $3,478 $2,585 $84,140 $72,130
Long-term debt and capital lease
obligations.......................... 1,495 1,654 2,352 648 418 1,517 1,705
Stockholders' equity................... 68,331 34,628 2,942 1,813 1,744 69,876 63,420
</TABLE>
4
<PAGE> 12
VSA SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
-----------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net revenues.......................... $18,142 $16,936 $15,276 $11,043 $9,395
Income (loss) from operations......... 636 283 378 (201) (250)
Net income (loss)..................... 276 52 301 (148) (141)
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30
-----------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total assets.......................... $5,993 $4,527 $4,928 $3,338 $2,834
Long-term debt and capital lease
obligations........................ 543 1,102 1,748 946 --
Stockholders' equity.................. 876 819 970 603 867
</TABLE>
5
<PAGE> 13
SUMMARY UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA
The following selected unaudited pro forma condensed combined financial
data are derived from the unaudited pro forma condensed combined financial
statements appearing elsewhere herein, which give effect to the Merger as a
pooling of interests, and should be read in conjunction with such unaudited pro
forma financial statements and the notes thereto. The pro forma information for
EAI is based on the historical financial statements contained in EAI's annual,
quarterly and current reports filed with the Commission and incorporated by
reference herein. The pro forma information for VSA for the years ended June 30,
1998 and 1997, and as of June 30, 1998 is based on the audited financial
statements and notes thereto appearing elsewhere herein. The pro forma
information for the years ended June 30, 1996 and 1995 is based on the unaudited
financial statements of VSA. In the opinion of the management of VSA, the
unaudited financial statements of VSA from which such data have been derived
contain all adjustments, consisting only of normal recurring accruals necessary
for the fair presentation of the results for, and as of the end of such periods.
VSA's fiscal year ends on June 30, therefore, VSA's unaudited results for the
six months ended June 30, 1998 and the calendar years ended December 31, 1997,
1996 and 1995 have been used to conform with EAI's fiscal year end. For the
purpose of the pro forma condensed combined operating data, EAI's unaudited
results of operations for the six months ended June 30, 1998 and the audited
results of operations for the fiscal years ended December 31, 1997, 1996 and
1995 have been combined with VSA's unaudited results of operations for the six
months ended June 30, 1998 and the calendar years ended December 31, 1997, 1996
and 1995. For the purpose of the pro forma condensed combined balance sheet
data, EAI's unaudited consolidated balance sheet as of June 30, 1998 has been
combined with VSA's unaudited consolidated balance sheet as of June 30, 1998,
giving effect to the Merger as if it had occurred on the first day of the
earliest period presented.
Pro forma operating data for the six months ended June 30, 1998 and the
year ended December 31, 1997 include the results of Sense8 Corporation
("Sense8"), which EAI acquired on June 17, 1998.
Pro forma operating data for the six months ended June 30, 1998 and the
years ended December 31, 1997 and 1996 and pro forma balance sheet data at June
30, 1998 include the results of Transom Technologies, Inc. ("Transom"). EAI
signed a definitive agreement to acquire Transom on July 29, 1998 with the
transaction expected to close during the third quarter of 1998. Transom's fiscal
year ends on March 31, therefore, Transom's unaudited results for the six months
ended June 30, 1998 and the calendar years ended December 31, 1997 and 1996 and
balance sheet data at June 30, 1998 have been used to conform to EAI's fiscal
year.
The summary unaudited pro forma condensed combined financial data are
presented for illustrative purposes only and are not necessarily indicative of
the operating results or financial position that would have been achieved if the
Sense8 and Transom acquisitions or the Merger had been consummated as of the
beginning of the periods presented or as of the dates presented, nor is such
data necessarily indicative of the future consolidated operating results or
financial position of EAI. The summary unaudited pro forma condensed combined
financial data do not give effect to any cost savings which may result from the
integration of the Sense8, Transom and VSA operations. In connection with the
Sense8 acquisition, $9.1 million of purchased in-process research and
development was charged against earnings in the second quarter of 1998 in
accordance with generally accepted accounting principles.
6
<PAGE> 14
SUMMARY UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
EAI AND SENSE8
<TABLE>
<CAPTION>
SIX MONTHS FISCAL YEAR FISCAL YEAR FISCAL YEAR
ENDED ENDED ENDED ENDED
JUNE 30, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
PRO FORMA COMBINED STATEMENT OF
OPERATIONS DATA:
Net revenues................... $34,322 $ 53,590 $27,189 $12,249
Income (loss) from
operations.................. (8,889) (11,142) 3,634 (1,212)
Net income (loss).............. (9,202) (12,626) 2,567 (1,890)
Earnings (loss) per share...... (0.90) (1.41) 0.30 (0.39)
</TABLE>
<TABLE>
<CAPTION>
AS OF
JUNE 30, 1998
-------------
<S> <C> <C> <C> <C>
PRO FORMA COMBINED CONSOLIDATED
BALANCE SHEET DATA:
Total assets................... $84,140
Long-term debt and capital
lease obligations........... 1,517
Stockholders' equity........... 69,876
</TABLE>
EAI, SENSE8 AND VSA
<TABLE>
<CAPTION>
SIX MONTHS FISCAL YEAR FISCAL YEAR FISCAL YEAR
ENDED ENDED ENDED ENDED
JUNE 30, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
PRO FORMA COMBINED STATEMENT OF
OPERATIONS DATA:
Net revenues................... $44,071 $ 70,605 $44,076 $24,867
Income (loss) from
operations.................. (8,095) (11,430) 4,317 (513)
Net income (loss).............. (8,813) (12,839) 2,917 (1,231)
Earnings (loss) per share...... (0.83) (1.37) 0.32 (0.24)
</TABLE>
<TABLE>
<CAPTION>
AS OF
JUNE 30, 1998
-------------
<S> <C> <C> <C> <C>
PRO FORMA COMBINED CONSOLIDATED
BALANCE SHEET DATA:
Total assets................... $90,133
Long-term debt and capital
lease obligations........... 2,060
Stockholders' equity........... 67,552
</TABLE>
7
<PAGE> 15
EAI, SENSE8 AND TRANSOM
<TABLE>
<CAPTION>
SIX MONTHS FISCAL YEAR FISCAL YEAR FISCAL YEAR
ENDED ENDED ENDED ENDED
JUNE 30, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
PRO FORMA COMBINED STATEMENT OF
OPERATIONS DATA:
Net revenues................... $35,341 $ 54,392 $27,208 $12,249
Income (loss) from
operations.................. (9,574) (12,864) 3,500 1,212
Net income (loss).............. (9,629) (13,665) 2,483 (1,890)
Earnings (loss) per share...... (0.92) (1.50) 0.28 (0.39)
</TABLE>
<TABLE>
<CAPTION>
AS OF
JUNE 30, 1998
-------------
<S> <C> <C> <C> <C>
PRO FORMA COMBINED CONSOLIDATED
BALANCE SHEET DATA:
Total assets................... $88,119
Long-term debt and capital
lease obligations........... 1,658
Stockholders' equity........... 71,918
</TABLE>
EAI, SENSE8, VSA AND TRANSOM
<TABLE>
<CAPTION>
SIX MONTHS FISCAL YEAR FISCAL YEAR FISCAL YEAR
ENDED ENDED ENDED ENDED
JUNE 30, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
PRO FORMA COMBINED STATEMENT OF
OPERATIONS DATA:
Net revenues................... $45,090 $ 71,407 $44,095 $24,867
Income (loss) from
operations.................. (8,780) (13,152) 4,183 (513)
Net income (loss).............. (9,240) (13,878) 2,833 (1,231)
Earnings (loss) per share...... (0.85) (1.45) 0.31 (0.24)
</TABLE>
<TABLE>
<CAPTION>
AS OF
JUNE 30, 1998
-------------
<S> <C> <C> <C> <C>
PRO FORMA COMBINED CONSOLIDATED
BALANCE SHEET DATA:
Total assets................... $94,112
Long-term debt and capital
lease obligations........... 2,201
Stockholders' equity........... 69,594
</TABLE>
8
<PAGE> 16
COMPARATIVE PER SHARE DATA
The following table sets forth certain unaudited historical per share data
of EAI and VSA and certain unaudited per share data on a pro forma basis after
giving effect to the Sense8 and Transom acquisitions as if Sense8 had been
acquired at the beginning of 1997 and Transom had been acquired on October 7,
1996 and to the Merger on a pooling-of-interests basis. This data should be read
in conjunction with the selected historical financial data and the unaudited pro
forma condensed combined financial statements included elsewhere herein and the
separate historical financial statements of EAI incorporated by reference herein
and of VSA appearing elsewhere herein. The pro forma combined data are not
necessarily indicative of the operating results or financial position that would
have been achieved if the Sense8 or Transom acquisitions or the Merger had been
consummated as of the beginning of the periods presented or as of the dates
presented, nor are they necessarily indicative of the future consolidated
operating results or financial position of EAI.
<TABLE>
<CAPTION>
SIX MONTHS FISCAL YEAR ENDED
ENDED ---------------------------------------------------------
JUNE 30, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
EAI HISTORICAL
Net loss per share.............. $(0.71) $(0.19) $0.30 $(0.39)
Book value per share............ 6.71
VSA HISTORICAL
Book value per share............ 12.73
TRANSOM HISTORICAL
Book value per share............ 0.35
PRO FORMA COMBINED DATA
EAI AND SENSE8
Net loss per share.............. $(0.90) $(1.41) $0.30 $(0.39)
Book value per share............ 6.71
EAI, SENSE8 AND VSA
Net loss per share.............. (0.83) (1.37) 0.32 (0.24)
Book value per share............ 6.21
EAI, SENSE8 AND TRANSOM
Net loss per share.............. (0.92) (1.50) 0.28 (0.24)
Book value per share............ 6.75
EAI, SENSE8, VSA AND TRANSOM
Net loss per share.............. (0.85) (1.45) 0.31 (0.24)
Book value per share............ 6.25
PRO FORMA EQUIVALENT DATA
EAI, SENSE8 AND VSA
Net loss per share.............. $(4.76) $(7.86) $1.84 $(1.38)
Book value per share............ 35.62
EAI, SENSE8 AND TRANSOM
Net loss per share.............. (5.28) (8.61) 1.61 (1.38)
Book value per share............ 38.74
EAI, SENSE8, VSA AND TRANSOM
Net loss per share.............. (4.88) (8.32) 1.78 (1.38)
Book value per share............ 35.90
</TABLE>
9
<PAGE> 17
RISK FACTORS
Certain matters discussed in this Information Statement/Prospectus are
forward-looking statements that involve substantial risks and uncertainties that
could cause actual results to differ materially from targets or projected
results. Factors that could cause actual results to differ materially include,
among others, those factors described below. Many of these factors are beyond
EAI's ability to predict or control. VSA shareholders are cautioned not to put
undue reliance on forward-looking statements, which statements have been made as
of the date of this Information Statement/Prospectus and VSA shareholders should
not infer that there has been no change in the affairs of EAI since the date
hereof that would warrant any modification of any forward-looking statement made
in this Information Statement/Prospectus. EAI disclaims any intent or obligation
to update publicly these forward-looking statements, whether as a result of new
information, future events or otherwise.
In addition to the other information in this Information
Statement/Prospectus, the following factors should be considered carefully by
VSA shareholders in evaluating EAI and its business before approving the Merger
Agreement.
IMPACT OF ACQUISITIONS
In addition to the Merger, EAI is also in the process of consummating
another acquisition. See "Information Concerning EAI and Sub." As a consequence
of this acquisition, EAI will grow in size and will broaden the range of
products that it offers. Any acquisition, however, involves inherent
uncertainties, such as the effect on the acquired business of integration into a
larger organization and the availability of management resources to oversee the
operations of the acquired business. EAI's ability to integrate the operations
of acquired companies is important to its future success. There can be no
assurance as to EAI's ability to integrate new businesses nor as to its success
in managing the larger operations resulting therefrom. Even though an acquired
business may have experienced profitability and growth as an independent company
prior to its acquisition by EAI, there can be no assurance that such
profitability and growth will continue thereafter.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Consummation of the Merger will have certain federal income tax
consequences to VSA and holders of VSA Common Stock. No ruling has been (or will
be) sought from the Internal Revenue Service as to the anticipated tax
consequences of the Merger. An opinion will be obtained from Ernst & Young LLP
that, subject to the conditions stated in the opinion, the Merger will qualify
as part of a tax free reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code"). However, such opinion
will be based upon certain facts and representations provided by the managements
of EAI and VSA and by certain shareholders of VSA, the inaccuracy of which could
affect the conclusion reached in the opinion. Further, such opinion is not
binding on the Internal Revenue Service. If the Merger does not qualify as part
of a tax free reorganization under Section 368(a) of the Code, the Merger will
be taxable to the VSA shareholders. See "The Merger -- Certain Federal Income
Tax Consequences."
VARIABILITY OF OPERATING RESULTS
EAI has experienced and expects to continue to experience fluctuations in
its quarterly results. EAI's revenues are affected by a number of factors,
including the timing of the introduction of new software and interactive
products by EAI and its competitors, seasonality of certain customer purchasers,
product mix, general economic conditions and EAI's ability to obtain agreements
from publishers and distributors to market EAI's products. EAI's operating
results also will vary significantly depending on changes in pricing, changes in
customer budgets and the volume and timing of orders received during the
quarter, which are difficult to forecast. As a result of the foregoing and other
factors, EAI may experience material fluctuations in future revenues and
operating results on a quarterly or annual basis. Therefore, EAI believes that
period to period comparisons of its revenues and operating results are not
necessarily meaningful and should not be relied upon as indicators of future
performance.
10
<PAGE> 18
TECHNOLOGICAL CHANGE AND MARKET ACCEPTANCE
EAI's success depends on its ability to develop and sell new products,
develop site licensing agreements with major manufacturers in the automotive,
aerospace, heavy equipment and other manufacturing industries, develop its 3D
and 2D software products for new platforms and continue to produce high-quality
interactive products in a timely and cost-effective manner. In addition, EAI
must continually anticipate, and adapt its products to, emerging computer
technologies and capabilities, such as enhanced graphics, sound, music, video
and speech generation. The life cycles of EAI's products are difficult to
estimate because the markets that EAI targets are in the early stages of
development and because of uncertainties arising from the effect of future
product enhancements, future developments in hardware and software technology
and future competition. If EAI's products become outdated and lose market share
or if new products or existing product upgrades are not introduced when demanded
by the market or are not accepted by the market, EAI's revenues and operating
results could be materially adversely affected. There is no assurance that EAI
will be able to introduce new products on a timely basis or that such new
products will be accepted in the market.
DEPENDENCE ON EMERGING MARKET FOR SOFTWARE PRODUCTS AND CUSTOMER CONCENTRATION
The market for enterprise-wide visualization software products in the
automotive, aerospace, heavy equipment and other manufacturing industries is
emerging and dependent on a number of variables, including customer preferences
and the rate of adoption of new technology. There can be no assurance that this
market will continue to grow or that EAI's software products will be accepted by
the market. EAI's growth is dependent in large part on significant demand for
its software products. In addition, as EAI markets its product visualization
software as an enterprise-wide solution, there can be no assurance that large
customers will be willing to invest in EAI's products on a company-wide basis or
that users outside the design and engineering areas will adopt EAI's product
visualization software products. In 1997, sales of software products to one
customer accounted for 19% of EAI's revenues. There can be no assurance that EAI
will be able to continue to sell software products to this customer at 1997
levels or, if it fails to do so, that EAI will be able to replace this customer
with new customers.
DEPENDENCE ON EMERGING MARKET FOR INTERACTIVE SOFTWARE PRODUCTS
The market for interactive multimedia software products is emerging and
dependent on a number of variables, including consumer preferences, shipments of
multimedia personal computers, the installed base of multimedia personal
computers and the number of other publishers creating interactive software
products. There can be no assurance that this market will continue to grow. The
market for games and educational multimedia software is characterized by rapid
changes in computer hardware and software technology and is highly competitive
with respect to timely product innovation. EAI's near-term growth is dependent
in part on significant demand for interactive products and the recognition by
publishers of EAI's ability to produce products that are well received by the
market. EAI typically contracts with a publisher to receive a development fee
and royalties on sales; however, EAI does not typically receive royalty revenues
from a product until the publisher achieves a minimum level of sales of the
product, which generally does not occur immediately after delivery of the
product to the publisher, if at all. There can be no assurance that EAI's new
interactive products will be accepted by the market or that EAI will be able to
respond effectively to the evolving requirements of the market.
RELIANCE ON THIRD PARTIES TO MARKET AND DISTRIBUTE INTERACTIVE SOFTWARE PRODUCTS
EAI's strategy has relied upon third parties to market and distribute its
interactive products. EAI does not have an exclusive relationship with any of
the current distributors of its interactive products. EAI's relationships with
publishers have generally involved contracts that address a single product or
title for a specific market area and have not constituted a continuing marketing
and distribution agreement. There can be no assurance that EAI's relationships
with publishers will continue or that EAI will be able to find other means to
market and distribute its interactive products. Failure to continue such
relationships, establish new relationships or develop independent means of
marketing and distributing interactive products could have a material adverse
effect on EAI's revenues and operating results.
11
<PAGE> 19
RELIANCE ON THIRD PARTIES TO MARKET AND DISTRIBUTE CERTAIN SOFTWARE PRODUCTS
In addition to marketing EAI's software products directly to end users, EAI
has contractual relationships with Hewlett-Packard to jointly market and with
Unigraphics Solutions and Structural Dynamics Research Corp. ("SDRC") to jointly
market and distribute certain of EAI's software products. Although these
contracts represent a significant marketing and distribution opportunity for
EAI's software products, there can be no assurance that these contractual
relationships will be successful in creating significant sales or that these
relationships will be continued beyond their contract terms.
MANAGEMENT OF GROWTH AND INTERNATIONAL EXPANSION
EAI has experienced and may continue to experience rapid growth, which
could place a significant strain on EAI's employees, operating procedures,
financial resources and information systems. EAI plans to introduce a
significant number of new products, increase its production capacity and
development expenditures, expand its sales and marketing initiatives and hire
additional employees. Such activities will require significant managerial
expertise. If EAI is unable to manage its growth effectively, EAI's revenues,
operating results and financial condition could be materially adversely
affected. In addition, in connection with EAI's plans to increase its sales and
marketing presence in Europe and Asia, EAI will be incurring expenses in advance
of revenues. If EAI is unsuccessful in generating sufficient revenues to recover
these expenses or is unable to hire, train and retain experienced international
sales and marketing personnel, EAI's revenues, operating results and financial
condition could be adversely affected. Increased international activity could
also expose EAI to foreign currency fluctuations, foreign labor laws and other
unforeseen problems.
COMPETITION
EAI expects significant competition in each of its two product lines:
Software Products
Large computer companies or companies competing in the computer-aided
design ("CAD"), computer-aided engineering ("CAE"), computer-aided manufacturing
("CAM") and product data management ("PDM") markets could offer products with
the same or similar functionality as offered by EAI. Such companies, some of
which have substantially greater financial and other resources than EAI, include
Autodesk, Inc., Dassault Systemes S.A., Division plc., International Business
Machines Corporation, Microsoft Corporation, Parametric Technology Corporation,
SDRC and Silicon Graphics, Inc. Although EAI believes it has a technological
advantage over potential competitors in these markets, maintaining its advantage
will require continuing investment by EAI in research and development and sales
and marketing. There can be no assurance that EAI will have sufficient resources
to make such investments or that such investments will be successful.
Interactive Products
The interactive software industry is intensely competitive. EAI's sales to
the educational and consumer markets may be adversely affected by the increasing
number of competitive products. EAI's interactive software products will compete
directly against other educational and consumer software products, including
multi-player Internet games. EAI's competitors in this area include a large
number of companies, some of which have substantially greater financial,
technical, marketing and other resources than EAI, such as Broderbund Software,
Inc., Cendant Corporation International, Digital Domain Inc., GT Interactive
Software Corp. and SoftKey International Inc. Moreover, large corporations, such
as Microsoft Corporation and The Walt Disney Company, which have substantial
bases of intellectual property content and substantial financial resources, have
entered or announced their intention to enter the market for consumer software.
While EAI believes that most special effects firms target the feature film
and advertising markets, these firms could refocus their efforts in the
commercial markets, an area in which EAI derives a portion of its interactive
product revenue. These special effects firms, some of which have substantially
greater financial, technical, marketing and other resources than EAI, include
Dreamworks SKG, Industrial Light and Magic (a
12
<PAGE> 20
division of Lucasfilm Limited) and Pixar. In addition, a large number of small
companies provide custom animations to commercial markets as a complement to
their primary business of studio film production, engineering consulting and
communications consulting.
YEAR 2000 COMPLIANCE
EAI has developed and implemented a plan to upgrade its information
technology in order to prepare for the year 2000 and has completed conversion of
all critical data processing systems. Management believes that all of EAI's
systems and applications are year 2000 compliant or will be by January 1, 1999.
EAI has also initiated communications with its significant vendors to determine
the extent to which EAI's systems may be vulnerable to third parties' failure to
remediate their own year 2000 issues. Management currently does not anticipate
such a failure to be an issue; however, operating results could be impacted if
the systems of other companies with whom EAI transacts business are not
compliant in a timely manner.
PROTECTION OF PROPRIETARY RIGHTS
EAI's success and ability to compete are dependent in part upon its
extensive proprietary technology and databases. EAI relies primarily on a
combination of copyright, trademark and trade secret laws, employee and third
party non-disclosure and non-competition agreements and other methods to protect
its proprietary rights. There can be no assurance that these measures will
prevent EAI's competitors from obtaining or using EAI's proprietary technology
and databases. Certain of EAI's products include mechanisms intended to prevent
or inhibit unauthorized copying. In addition, EAI packages its software products
with license agreements, which prohibit unauthorized copying of such products.
Unauthorized copying does, however, occur in the software industry, and if a
significant amount of unauthorized copying of EAI's products were to occur,
EAI's revenues and operating results could be adversely affected. The laws of
certain countries in which EAI's products are or may be distributed do not
protect EAI's products and proprietary rights to the same extent as do the laws
of the United States. Furthermore, as the number of software products in the
industry increases and the functionality of these products further overlaps,
software developers may increasingly become subject to infringement claims.
There can be no assurance that third parties will not assert infringement claims
against EAI in the future with respect to current or future products, or that
any such assertion will not require EAI to enter into royalty arrangements or
result in costly litigation.
DEPENDENCE ON KEY PERSONNEL
EAI's future success depends in large part on the continued service of its
key technical, marketing, sales and management personnel and on its ability to
continue to attract, motivate and retain highly qualified employees. EAI's key
employees may voluntarily terminate their employment with EAI at any time.
Competition for such employees is intense, and the process of locating key
technical and management personnel with the combination of skills and attributes
required to execute EAI's strategy can be lengthy. Accordingly, the loss of the
services of key personnel could have a material adverse effect on EAI's
revenues, operating results and financial condition. EAI maintains key person
insurance covering certain of its executive officers; however, the amount of
insurance may not be sufficient to offset EAI's loss of the services of any of
its executive officers.
RISK OF LIABILITY CLAIMS BY CUSTOMERS
Although EAI has not experienced product liability claims by customers, EAI
could experience such claims in the future. EAI's interactive software products
carry a disclaimer that the products should not be used for diagnostic or
treatment purposes and are only for educational and medical reference purposes.
EAI has general liability insurance and insurance for errors and omissions in
the content of its products. If a liability claim were to be made, there can be
no assurance that EAI would be successful in defending against the claim or, if
unsuccessful, that the amount of insurance coverage, if any, would be sufficient
to pay the claim.
13
<PAGE> 21
SHARE PRICE VOLATILITY
The trading price of the EAI Common Stock could be subject to wide
fluctuations in response to quarter to quarter variations in operating results,
changes in earnings estimates by analysts, announcements of technological
innovations or new products by EAI or its competitors, general conditions in the
software and computer industries and other events or factors. In addition, in
recent years the stock market in general, and the shares of technology companies
in particular, have experienced extreme price fluctuations. This volatility has
had a substantial effect on the market prices of securities issued by many
companies for reasons unrelated to the operating performance of the specific
companies. These broad market fluctuations may adversely affect the market price
of the EAI Common Stock.
ANTI-TAKEOVER PROVISIONS
EAI's Certificate of Incorporation and By-laws and Delaware law contain
provisions that may have the effect of delaying, deferring or preventing a
non-negotiated merger or other business combination involving EAI. These
provisions are intended to encourage any person interested in acquiring EAI to
negotiate with and obtain the approval of EAI's Board of Directors in connection
with the transaction. Certain of these provisions may, however, discourage a
future acquisition of EAI not approved by its Board of Directors in which EAI's
stockholders might receive an attractive value for their shares or that a
substantial number or even a majority of EAI's stockholders might believe to be
in their best interest. As a result, EAI stockholders who desire to participate
in such a transaction may not have the opportunity to do so. Such provisions
could also discourage bids for the shares of EAI Common Stock at a premium, as
well as create a depressive effect on the market price of the shares of EAI
Common Stock. In addition to the EAI Common Stock, EAI's Certificate of
Incorporation authorizes the issuance of up to 20,000,000 shares of preferred
stock. EAI has no current plans to issue any shares of preferred stock; however,
because the rights and preferences for any series of preferred stock may be set
by EAI's Board of Directors in its sole discretion, EAI may issue preferred
stock that has rights and preferences superior to the rights of holders of
shares of the EAI Common Stock and thus may adversely affect the rights of
holders of shares of the EAI Common Stock. In addition, EAI's Board of Directors
has adopted a Stockholders Rights Plan that may have an anti-takeover effect and
may discourage or prevent takeover attempts not first approved by the Board of
Directors (including takeovers that certain stockholders may deem to be in their
best interests). See "Rights of EAI Stockholders and VSA Shareholders --
Description of EAI Stock."
DIVIDENDS
EAI has not paid any cash dividends and does not currently anticipate
paying cash dividends in the future. There can be no assurance that EAI will
ever pay a cash dividend. See "Dividend Policy."
14
<PAGE> 22
THE SPECIAL MEETING OF THE
VSA SHAREHOLDERS
DATE, TIME AND PLACE
The special meeting (the "Meeting") of the shareholders of Variation
Systems Analysis, Inc., a Michigan corporation ("VSA"), will be held on
September , 1998 at the offices of VSA located at 300 Maple Park Boulevard,
St. Clair Shores, Michigan, 48081 at 9:00 a.m., Eastern Time.
PURPOSE OF THE MEETING
At the Meeting, the shareholders of VSA will be asked to consider and vote
upon a proposal to approve a Plan and Agreement of Merger dated as of July 29,
1998 (the "Merger Agreement") among Engineering Animation, Inc., a Delaware
corporation ("EAI"), EAI Victory, Inc., a Michigan corporation and a wholly
owned subsidiary of EAI ("Sub"), and VSA, pursuant to which, among other things,
Sub will be merged with and into VSA (the "Merger") and, as the surviving
corporation, VSA will become a wholly owned subsidiary of EAI. See "The Merger."
RECORD DATE
Only holders of record of VSA Common Stock, par value $1.00 per share (the
"VSA Common Stock"), at the close of business on August 14, 1998 (the "Record
Date") are entitled to vote at the Meeting. At the close of business on the
Record Date, there were 69,970 shares of VSA Common Stock outstanding, each of
which is entitled to one vote at the Meeting.
REQUIRED VOTE
The representation in person or by proxy of at least a majority of the
issued and outstanding shares of VSA Common Stock is necessary to establish a
quorum for the transaction of business at the Meeting. According to the Michigan
Business Corporation Act (the "MBCA"), the affirmative vote of a majority of the
outstanding shares of the VSA Common Stock is necessary to approve the Merger
Agreement.
On the Record Date, directors and executive officers of VSA and their
affiliates had the right to vote approximately 90% of all issued and outstanding
shares of VSA Common Stock. See "Information Concerning VSA -- Security
Ownership."
The approval of EAI's stockholders is not required for EAI to consummate
the Merger.
15
<PAGE> 23
THE MERGER
Set forth below is a brief description of various provisions of the Merger
Agreement with references to specific sections. This summary does not purport to
be complete and is qualified in its entirety by reference to the complete Merger
Agreement, which is attached to this Information Statement/Prospectus as
Appendix A and is incorporated by reference herein. The shareholders of VSA are
urged to read the Merger Agreement in its entirety.
BACKGROUND OF THE MERGER
On June 24, 1998, Mark Craig, President and Chief Executive Officer, and
Colin Wearring, Vice President of Software Development for VSA, traveled to
EAI's facility to present VSA's technology and vision to several of EAI's senior
managers including Dr. Martin J. Vanderploeg, EAI's Executive Vice President and
Chief Technology Officer. The purpose of the meeting was for each company to
learn more about each other's products and technologies focusing on developing a
mutually beneficial relationship. VSA and EAI had been talking to one another
through common customer accounts at the engineering working level for over one
year. The discussion in Ames, Iowa determined that an extremely synergistic
relationship could exist combining EAI's technology with VSA's products and
services.
Following the meeting in Ames, VSA and EAI management decided to continue
discussions towards a more comprehensive relationship, including a potential
merger of EAI and VSA, subject to a feasibility analysis of integrating VSA's
and EAI's respective software products.
On July 8, there was a meeting held in Chicago between Jerome M. Behar,
Chief Financial Officer of EAI, Michael Barry, Co-General Manager of EAI, Dr.
Martin Vanderploeg and VSA's senior management, including Mark Craig, to further
discuss the possibilities of a merger.
On July 10, the EAI technical team led by Jeff Trom, EAI's Vice President
of Software Development, met with the VSA software development team at VSA
headquarters in St. Clair Shores Michigan to evaluate the software capabilities
of both companies to determine the feasibility of integrating VSA software with
EAI's VisProducts. The result of the technical review was positive and a
decision was made to move forward with a merger of the two companies.
On July 16, there was a meeting held between Jerome M. Behar, Michael Barry
and VSA management, including Mr. Craig, to negotiate the terms of the merger. A
non-binding letter of intent was signed by EAI and VSA on July 17, 1998. On July
17, Mark Craig contacted the law firm of Timmis & Inman L.L.P. to discuss the
structure and terms of the proposed merger. During the week of July 20, the
parties negotiated the terms of the Merger Agreement and the transaction.
On July 28, Dr. Matthew M. Rizai, President and Chief Executive Officer of
EAI, met with Mark Craig in St. Clair Shores to discuss final details of the
merger. On July 29, 1998, the Merger Agreement between VSA and EAI was signed.
VSA'S REASONS FOR THE MERGER; RECOMMENDATION OF THE VSA BOARD
Certain matters discussed below are forward-looking statements that involve
substantial risks and uncertainties that could cause actual results to differ
materially from targets or projected results. Factors that could cause actual
results to differ materially include among others, those factors described in
"Risk Factors." Many of these factors are beyond VSA's ability to predict or
control. VSA shareholders are cautioned not to put undue reliance on
forward-looking statements, which statements have been made as of the date of
this Information Statement/Prospectus and VSA shareholders should not infer that
there has been no change in the affairs of VSA or EAI since the date hereof that
would warrant any modification of any forward-looking statement made in this
Information Statement/Prospectus. VSA and EAI disclaim any intent or obligation
to update publicly these forward-looking statements, whether as a result of new
information, future events or otherwise.
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The VSA Board has determined that the Merger is advisable, fair to and in
the best interests of the shareholders of VSA. Accordingly, the VSA Board has
unanimously approved the Merger and the Merger Agreement, and recommends that
the shareholders of VSA vote for its adoption. In reaching the determination
that the Merger Agreement and the Merger are in the best interests of VSA and
its shareholders, the VSA Board consulted with management as well as its
financial advisors, legal counsel and accountants and considered the short-term
and long-term interests of VSA based upon several factors to which relative
weights were not assigned. Among the most important factors the VSA Board
considered were the following:
(i) EAI's financial resources and access to capital will enhance VSA's
ability to continue to grow its business and fund ongoing research and
development.
(ii) Pursuant to the Merger, the VSA shareholders will receive EAI
Common Stock based on a valuation of VSA that reflects a significant
premium over recent valuations of VSA.
(iii) EAI and VSA expect to offer software products that provide VSA's
3D tolerance analysis and comprehensive assembly circulation technology
embedded into EAI's viewing solutions, which should give the companies
greater market acceptance and competitive advantage.
(iv) EAI's and VSA's respective businesses, prospects, financial
performance, management depth, operations, technology and strategic
opportunities.
(v) VSA will have access to EAI's distribution and marketing
infrastructure which will provide more cost effective product distribution,
shipping and customer billing.
(vi) The Merger will provide liquidity in the public market for VSA's
shareholders by replacing the illiquid VSA stock with publicly-traded EAI
Common Stock on a tax deferred basis.
(vii) VSA and its shareholders will realize the benefit of significant
synergies and ongoing operational cost savings as a result of consolidated
operating functions and the elimination of duplicative expenses.
The VSA Board also considered certain potentially negative factors which
could arise from the Merger. These included, among others, the significant costs
involved in connection with consummating the Merger, the substantial management
time and effort required to effectuate the Merger and integrate the businesses
of EAI and VSA and the related disruption to VSA's operations. The VSA Board
also considered the risk that the anticipated benefits of the Merger might not
be fully realized. The VSA Board did not believe that these factors were
sufficient, either individually or collectively, to outweigh the advantages of
the Merger.
EAI'S REASONS FOR THE MERGER
Certain matters discussed below are forward-looking statements that involve
substantial risks and uncertainties that could cause actual results to differ
materially from targets or projected results. Factors that could cause actual
results to differ materially include, among others, those factors described in
"Risk Factors." Many of these factors are beyond EAI's ability to predict or
control. VSA shareholders are cautioned not to put undue reliance on
forward-looking statements, which statements have been made as of the date of
this Information Statement/Prospectus and VSA shareholders should not infer that
there has been no change in the affairs of EAI since the date hereof that would
warrant any modification of any forward-looking statement made in this
Information Statement/Prospectus. EAI disclaims any intent or obligation to
update publicly these forward-looking statements, whether as a result of new
information, future events or otherwise.
This Merger further implements EAI's growth strategy to provide customers
with comprehensive integrated enterprise solutions through a unique synergy in
technology, products and markets. VSA's products permit 3D simulation of
manufacturing and variation in the digital manufacturing environment and will
add a critical component to EAI's visualization and digital prototyping
solutions, which will enable EAI to implement advanced digital prototyping that
more accurately reflects the results users would achieve in building a physical
product. EAI expects to use VSA's technology to create a unique solution that
will enable its customers to dynamically reflect manufacturing variations in the
final product assembly, resulting in higher quality and lower cost products.
Moreover, the addition of VSA's dimensional analysis consulting services and
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software will strengthen EAI's consulting and services capabilities, which are
key components for providing fully integrated enterprise solutions to customers.
EAI anticipates that the addition of VSA's dimensional analysis consulting
services and software will benefit customers by allowing them to clearly define
product dimensional requirements at the beginning of the product design cycle to
determine if the design, manufacturing and assembly process, as specified,
optimally achieves product requirements to reduce concept-to-market time,
improve product quality and reduce costs.
MERGER CONSIDERATION
Upon the terms and subject to the conditions contained in the Merger
Agreement, at the Effective Time (as defined below), (i) Sub will be merged with
and into VSA, (ii) each outstanding share of VSA Common Stock (other than shares
to be canceled pursuant to clause (iii) below) will be converted into the right
to receive that number of shares of EAI Common Stock equal to the Exchange Ratio
(as defined below), and (iii) each share of VSA Common Stock owned by VSA as
treasury shares or owned directly or indirectly by VSA or EAI will be canceled
and will cease to exist, and no stock of EAI or other consideration will be
delivered in exchange therefor.
Pursuant to the Merger Agreement, the exchange ratio (the "Exchange Ratio")
will be equal to the quotient of (x) the number obtained by dividing (i)
$26,000,000 by (ii) the total number of shares of VSA Common Stock outstanding
immediately prior to the Effective Time, divided by (y) the EAI Stock Value
(which was $61.65, based on the average of the closing sale price of EAI Common
Stock, as reported on the Nasdaq Stock Market National Market (the "NNM"), for
the five trading days commencing with July 23, 1998 and continuing through July
29, 1998, as reported in the NNM listings published in the Wall Street Journal).
Based on the number of shares of VSA Common Stock currently expected to be
outstanding at the Effective Time, the Exchange Ratio will be 5.740399. [Section
2.4(a)]
EFFECTIVE TIME OF THE MERGER
"Effective Time" shall mean the time at which the Merger becomes effective.
The Merger will become effective upon the filing of the required merger
documents with the Michigan Secretary of State, which Sub and VSA expect will
occur on the date of the Closing. See "-- Conditions to Closing."
CONVERSION OF SHARES IN THE MERGER
All of the shares of VSA Common Stock converted into EAI Common Stock
pursuant to the Merger will no longer be outstanding and will automatically be
canceled and cease to exist at the Effective Time, and each certificate
previously representing any such VSA Common Stock (a "VSA Certificate") will
thereafter represent the right to receive (i) a certificate representing the
number of whole shares of EAI Common Stock and (ii) cash in lieu of fractional
shares into which the shares of VSA Common Stock represented by such VSA
Certificate have been converted. If, prior to the Effective Time, the
outstanding shares of EAI Common Stock or VSA Common Stock are increased,
decreased, changed into or exchanged for a different number or kind of shares or
securities as a result of a reorganization, recapitalization, reclassification,
stock dividend, stock split, reverse stock split, or other similar change in
capitalization, then EAI and VSA have agreed that an appropriate and
proportionate adjustment will be made to the Exchange Ratio. [Section 2.4 (a)
and (c)]
At the Effective Time, all shares of VSA Common Stock that are owned by VSA
as treasury stock or owned, directly or indirectly, by VSA or EAI will be
canceled and will cease to exist, and no stock of EAI or other consideration
will be delivered in exchange therefor. All shares of EAI Common Stock that are
owned by VSA will become treasury stock of EAI. [Section 2.4(e)]
EXCHANGE OF CERTIFICATES
At or any time after the Closing, each shareholder of VSA (including the
trustee (the "ESOP Trustee") of the Variation Systems Analysis, Inc. Employee
Stock Ownership Plan (the "ESOP") as record holder of VSA Common Stock held by
the ESOP) shall have the right to deliver to EAI a properly completed letter of
transmittal in form reasonably satisfactory to EAI (the "Transmittal Letter")
and VSA Certificates
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representing all of the issued and outstanding shares of VSA Common Stock owned
by such shareholder, duly endorsed for transfer or accompanied by duly executed
stock powers, free and clear of all options, liens, claims, charges,
restrictions and other encumbrances of any nature or kind whatsoever, other than
federal and state securities law restrictions. Upon proper surrender of a VSA
Certificate for exchange and cancellation to EAI, and in accordance with and
subject to the other provisions of the Merger Agreement and the Transmittal
Letter, the holder of such VSA Certificate shall receive in exchange therefor
(i) a certificate representing that number of whole shares of EAI Common Stock
to which such holder of VSA Common Stock shall have become entitled, and (ii) a
check representing the amount of any cash in lieu of fractional shares which
such holder has the right to receive. The VSA Certificate so surrendered shall
forthwith be canceled. No interest shall be paid or accrued on any cash in lieu
of fractional shares payable to holders of VSA Certificates. If any certificate
representing shares of EAI Common Stock is to be issued in a name other than
that in which the VSA Certificate surrendered in exchange therefor is
registered, it shall be a condition of the issuance thereof that the VSA
Certificate shall be properly endorsed (or accompanied by an appropriate
instrument of transfer) and otherwise in proper form for transfer, and that the
person requesting such exchange shall pay to EAI in advance any transfer or
other taxes required by reason thereof, or shall establish to the satisfaction
of EAI that such tax has been paid or is not payable. In the event any VSA
Certificate shall have been lost, stolen or destroyed, the person so claiming
shall make an affidavit of that fact and indemnify EAI against any claim that
may be made against it with respect to such VSA Certificate. Thereafter, EAI
shall issue in exchange for such lost, stolen or destroyed VSA Certificate the
shares of EAI Common Stock and any cash in lieu of a fractional share
deliverable in respect thereof pursuant to the Merger Agreement. The ESOP
Trustee will surrender for payment VSA Certificates held by the ESOP if the
Merger is consummated. [Sections 2.4(b) and 2.5]
After the Effective Time, there will be no transfers on VSA's stock
transfer books of shares of VSA Common Stock. [Section 2.4(f)]
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties by EAI
and VSA. The representations and warranties of VSA relate to VSA and, more
specifically, to the corporate organization and capital structure of VSA; VSA's
authority to consummate the transactions contemplated by the Merger Agreement
and the lack of conflicts with certain of VSA's other obligations; regulatory
matters; the filing of required governmental reports; compliance with laws;
VSA's financial statements; the absence of certain changes affecting VSA since
June 30, 1998; the absence of material legal proceedings or restrictions
affecting VSA; tax matters; employee benefit matters; the ESOP; VSA's employment
and labor relations; contractual matters; the absence of certain undisclosed
liabilities; environmental matters; the tangible assets owned by VSA; real
property matters; intellectual property matters; inventory; the notes and
accounts receivable of VSA; the bank accounts, powers of attorney and guaranties
granted by VSA; certain insurance matters; service contracts and warranties
entered into by VSA; the disclosure of certain relationships between VSA and
certain of its affiliates; the information to be included in the Registration
Statement on Form S-4 (the "S-4"); broker's or finder's fees; certain customer
relationships of VSA; and the lack of omissions in any disclosure to EAI.
[Article III]
EAI also makes various representations and warranties in the Merger
Agreement relating to its corporate organization and capital structure; EAI's
authority to consummate the Merger Agreement and the lack of conflicts with
certain of its other obligations; regulatory matters; EAI's reports under the
Exchange Act filed with the Commission; information to be included in the S-4;
the ownership and activities of Sub; broker's or finder's fees; the absence of
certain changes affecting EAI since December 31, 1997; the absence of certain
legal proceedings; compliance with laws; intellectual property matters; and the
lack of omissions in any disclosure to VSA. [Article IV]
CONDUCT OF BUSINESS PENDING CONSUMMATION OF THE MERGER
VSA has agreed that, prior to the Effective Time, it will conduct its
business in the ordinary course consistent with past practice, use its
reasonable efforts to maintain and preserve intact its business organization
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and advantageous business relationships, retain the services of its key officers
and employees and take no action that would adversely affect or delay the
ability of either of EAI or VSA to obtain the necessary governmental approvals
to consummate the transactions contemplated by the Merger Agreement. EAI has
agreed that prior to the Effective Time, it will take no action that would
adversely effect or delay the ability of VSA or EAI to obtain the necessary
governmental approvals to consummate the transactions contemplated by the Merger
Agreement. [Section 5.1]
VSA has also agreed that, prior to the Effective Time, it will not take any
of the following actions without the prior written consent of EAI: incur any
indebtedness for borrowed money or otherwise become liable for the obligations
of another, or make any loan or advance; engage in certain actions regarding its
capital structure; sell, transfer or encumber any properties or release any
indebtedness or claims of third parties except in the ordinary course of
business consistent with past practice; make an investment in a third party;
enter into, amend or terminate certain contracts, except in the ordinary course
of business consistent with past practice; take certain actions regarding
compensation and benefits matters; settle any claim, action or proceeding
involving money damages, except in the ordinary course of business consistent
with past practice; take any action that would prevent or impede the Merger from
qualifying for "pooling-of-interests" accounting treatment, or as a tax free
reorganization within the meaning of the Code; amend its Articles of
Incorporation or By-laws; or take any action that is intended or may reasonably
be expected to result in any of the representations and warranties set forth in
the Merger Agreement being or becoming untrue in any material respect, any of
the conditions to the Merger not being satisfied, or the violation of any
provision of the Merger Agreement, except as may be required by applicable law.
[Section 5.2]
In addition, EAI has agreed that, prior to the Effective Time, it will not
take any of the following actions without the prior written consent of VSA:
make, declare or pay any cash dividend or distribution on its capital stock;
sell, transfer, mortgage, encumber or otherwise dispose of substantially all of
its properties or assets; merge or combine with another entity (except as part
of an acquisition of another entity under certain circumstances); take any
action that would prevent the Merger from qualifying for "pooling-of-interests'
accounting treatment or as a reorganization within the meaning of the Code;
amend its Certificate of Incorporation or By-Laws; or take any action that is
intended or may reasonably be expected to result in any of the representations
and warranties set forth in the Merger Agreement being or becoming untrue in any
material respect, any of the conditions of the Merger not being satisfied, or
the violation of any provision of the Merger Agreement, except as may be
required by applicable law. [Section 5.3]
CONDITIONS TO CLOSING
The obligations of EAI, Sub and VSA to effect the Merger are subject to the
satisfaction at or prior to the Effective Time of the following conditions: (i)
all regulatory approvals required to consummate the transactions contemplated by
the Merger Agreement must be obtained and must remain in full force and effect
and all statutory waiting periods in respect thereof must have expired; (ii) the
S-4 shall have become effective under the Securities Act and no stop order
suspending the effectiveness of the S-4 shall have been issued and no proceeding
for that purpose shall have been initiated or threatened by the Commission;
(iii) the EAI Common Stock to be issued in the Merger must have been authorized
for listing on the NNM, subject to official notice of issuance; (iv) no order,
injunction or decree issued by any governmental authority or other legal
restraint or prohibition preventing the consummation of the Merger or any of the
other transactions contemplated by the Merger Agreement shall be in effect, and
no law, statute, rule, regulation, order, injunction or decree shall have been
enacted, entered, promulgated or enforced by any governmental authority which
prohibits, materially restricts or makes illegal the consummation of the Merger
or the other transactions contemplated by the Merger Agreement; and (v) the
Merger Agreement and the transactions contemplated thereby must have been
approved by holders owning a majority or more of the issued and outstanding
shares of VSA Common Stock. [Section 7.1]
The obligation of EAI and Sub to effect the Merger is also subject to the
satisfaction or waiver by EAI at or prior to the Effective Time of the following
conditions: (i) the representations and warranties of VSA must be true and
correct in all material respects as of the Closing (except to the extent that
such representations and warranties speak as of an earlier date), and VSA must
have performed in all material respects all of its
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obligations pursuant to the Merger Agreement, and EAI shall have received a
certificate signed by VSA's chairman and president to that effect; (ii) holders
of not more than 10% percent of the outstanding VSA Common Stock shall have
validly exercised their "dissenters' rights" pursuant to Section 762 of the
MBCA; (iii) EAI must have received from each affiliate of VSA, an executed
letter agreement substantially in the form attached to the Merger Agreement;
(iv) VSA must have in its personnel files an executed copy of its proprietary
information agreement from each of its employees; (v) Mark E. Craig shall have
executed and delivered to EAI an employment agreement substantially in the form
attached to the Merger Agreement; (vi) EAI must have received a legal opinion
from Timmis & Inman substantially in the form attached to the Merger Agreement,
together with such closing documents and certificates as EAI or its counsel
shall reasonably request; (vii) EAI must have received from VSA and certain
shareholders of VSA certificates substantially in the form attached to the
Merger Agreement; (viii) EAI must have received a legal opinion from counsel to
the ESOP substantially in the form attached to the Merger Agreement; (ix) EAI
must have received the executed Intellectual Property Assignment in a form
satisfactory to EAI; (x) there shall not have occurred any change in VSA that
would have a material adverse effect on its business, properties, profits,
operations or financial condition; and (xi) VSA shall have received payment in
full of all amounts owed to it by Mark E. Craig or any entity controlled by him
or any of his immediate family members. [Section 7.2]
The obligation of VSA to effect the Merger is also subject to the
satisfaction or waiver by VSA at or prior to the Effective Time of the following
conditions: (i) the representations and warranties of EAI must be true and
correct in all material respects as of the Closing (except to the extent that
such representations and warranties speak as of an earlier date), and EAI must
have performed in all material respects all of its obligations pursuant to the
Merger Agreement, and VSA must have received a certificate signed by EAI's chief
executive officer or chief financial officer to that effect; (ii) VSA must have
received a legal opinion from Jamie A. Wade, General Counsel of EAI,
substantially in the form attached to the Merger Agreement, together with such
closing documents and certificates as VSA or its counsel shall reasonably
request; (iii) Mark E. Craig shall have received a release of all guarantees by
him of any obligation of VSA and payment in full of all amounts owed to him
other than salary payable in the ordinary course of business; (iv) EAI shall
have executed and delivered to Mark E. Craig an Employment Agreement in
substantially the form attached to the Merger Agreement; and (v) there shall not
have occurred any change in EAI or its subsidiaries that would have a material
adverse effect on the business, properties, profits, operations or financial
condition of EAI and its subsidiaries taken as a whole. [Section 7.3]
At any time prior to the Effective Time, the respective Boards of Directors
of EAI and VSA may, to the extent legally allowed, amend the Merger Agreement,
extend the time for the performance of any of the obligations or other acts of
the parties, waive any inaccuracies in the representations and warranties
contained in the Merger Agreement or in any document delivered pursuant thereto
or waive compliance with any of the agreements or conditions contained therein.
However, after the shareholders of VSA have approved the Merger Agreement and
the consummation of the transactions contemplated thereby, no amendment,
extension or waiver of the Merger Agreement which reduces the amount or changes
the form of the consideration to be delivered to the holders of VSA Common Stock
may be effected unless the consent of the VSA shareholders is obtained. [Section
8.3]
TERMINATION AND TERMINATION FEE
The Merger Agreement may be terminated and the Merger may be abandoned any
time prior to the Effective Time by the written mutual consent of the EAI and
VSA Boards of Directors, if the Board of Directors of each so determines by the
vote of a majority of the members of the Board. The Merger Agreement may be
terminated in certain other circumstances, as follows:
(i) by either the VSA or the EAI Board of Directors, if any
governmental authority required to grant a regulatory approval has denied
approval of the Merger, or any governmental authority of competent
jurisdiction has issued an order permanently enjoining or otherwise
prohibiting the consummation of the transactions contemplated by the Merger
Agreement;
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(ii) by either the VSA or the EAI Board of Directors (provided that
the terminating party is not then in material breach of any representation,
warranty, covenant or other agreement contained in the Merger Agreement),
if (x) there has been a material breach of any of the representations or
warranties or any of the covenants or agreements contained in the Merger
Agreement on the part of the other party which has resulted in a material
adverse effect on the other party, which breach is not cured within 60 days
following written notice to the party committing such breach, (y) the
Closing shall not have occurred on or before November 30, 1998, provided
that neither Board of Directors shall be entitled to terminate the Merger
Agreement pursuant to (y) if the reason the Closing has not occurred by
such date is because any governmental authority that is required to grant a
regulatory approval in connection with the Merger has failed to act, the
Meeting shall not have occurred in accordance with the requirements of the
MBCA, or some similar event beyond the control of both parties shall not
have occurred by such date, or (z) the Closing shall not have occurred on
or before December 31, 1998; or
(iii) by the VSA Board of Directors (after consulting with its legal
counsel), if such action is required for the Board of Directors to comply
with its fiduciary duties to VSA and its shareholders; provided, however,
that if such action is taken by VSA, then within two days of such
termination, VSA shall reimburse EAI for its out-of-pocket expenses
incurred in connection with the transactions contemplated by the Merger
Agreement; and provided, further, that if VSA consummates any transaction
pursuant to a Takeover Proposal (as defined below) (x) within 12 months
following the date of the Merger Agreement, or (y) pursuant to a definitive
agreement executed by VSA during such 12-month period, then VSA shall also
promptly pay to EAI $1,300,000 upon the occurrence of such a transaction;
provided, however, if the Meeting shall have occurred and the VSA
shareholders have voted with respect to approval of the Merger and the vote
necessary to approve the Merger is not received, then the Merger Agreement
shall automatically terminate as of the date of the Meeting and, within 2
days of such termination, VSA will pay to EAI $1,300,000 and shall
reimburse EAI for its out-of-pocket expenses (in an amount not to exceed
$100,000) incurred in connection with the transactions contemplated in the
Merger Agreement. [Section 8.1]
NO SOLICITATIONS
The Merger Agreement places certain restrictions on the extent to which VSA
may negotiate with prospective purchasers other than EAI. The Merger Agreement
specifically provides that VSA shall not, and it shall use its reasonable
efforts to cause its directors, officers and employees, and all investment
bankers, attorneys or other advisors or representatives retained by VSA not to,
(i) solicit or encourage the submission of any Takeover Proposal, (ii)
participate in any discussions or negotiations regarding, or furnish to any
third party any information with respect to, or take any other action to
facilitate any inquiries or the making of any proposal that constitutes, a
Takeover Proposal, (iii) make or authorize any statement or recommendation in
support of any Takeover Proposal, or (iv) enter into any agreement with respect
to any Takeover Proposal. [Section 6.8]
Notwithstanding the foregoing paragraph, the directors, executive officers
or shareholders of VSA, or the investment bankers, attorneys, or other advisors
or representatives of VSA may participate in discussions or negotiations with,
or furnish information to, any third party that makes a Takeover Proposal if all
of the following events shall have occurred: (i) EAI has been notified in
writing of such Takeover Proposal within 24 hours of VSA's receipt thereof,
including the identity of the party making the Takeover Proposal and the
material terms thereof; (ii) such third party has made a written Takeover
Proposal to the VSA Board of Directors, which proposal identifies a price or
range of values to be paid based on the advice of VSA's investment bankers, the
VSA Board of Directors has determined that such Takeover Proposal is financially
more favorable to the shareholders of VSA than the terms of the Merger; (iii)
the VSA Board of Directors has determined based on the advice of VSA's
investment bankers, that such third party is financially capable of consummating
the transactions specified in such Takeover Proposal; and (iv) the VSA Board of
Directors has determined, after consultation with its outside legal counsel,
that its fiduciary duties require it to furnish information to and negotiate
with such third party. Notwithstanding the foregoing, however, VSA is prohibited
from providing any non-public information to such third party unless (x) prior
to the date thereof VSA has
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provided such information to EAI, (y) VSA has notified EAI in advance of any
such proposed disclosure of non-public information and has provided EAI with a
description of the information VSA intends to disclose, and (z) VSA provides
such non-public information pursuant to a nondisclosure agreement in a form
satisfactory to EAI. In addition to the foregoing requirements, VSA shall not
accept or enter into any agreement concerning a Takeover Proposal until at least
48 hours after EAI's receipt of a copy of such Takeover Proposal. [Section
6.8(b) and (c)]
Upon compliance with the requirements in the preceding paragraph, VSA is
entitled to terminate the Merger Agreement, although VSA may then be obligated
to make certain payments to EAI. See "-- Termination and Termination Fee."
[Section 6.8(c)]
For purposes of the Merger Agreement, "Takeover Proposal" is defined as any
proposal or offer for a merger, consolidation or other business combination
involving VSA or any proposal or offer to acquire a material equity interest in,
or a substantial portion of the assets of, VSA, other than by EAI as
contemplated by the Merger Agreement. [Section 6.8(c)]
INDEMNIFICATION
Mark E. Craig has agreed to indemnify EAI and its affiliates for losses,
costs, claims, liabilities, damages, penalties and expenses incurred or suffered
by EAI or its affiliates relating to or arising out of or in connection with:
(i) any breach of certain representations and warranties made by VSA in the
Merger Agreement, or (ii) any breach of or failure by VSA to perform any of its
covenants or obligations set out or contemplated in the Merger Agreement or any
document delivered at or in connection with the Closing. The representations and
warranties of VSA covered by the indemnification relate to: the capital
structure of VSA; VSA's financial statements; the absence of material legal
proceedings or restrictions affecting VSA; tax matters; employee benefit
matters; the ESOP; and intellectual property matters. [Section 9.1]
Mr. Craig's liabilities under the Merger Agreement are limited to a maximum
of $3,000,000. In addition, Mr. Craig will not be liable for any individual
indemnification claim unless such claim exceeds $10,000 and will not be liable
for the first $300,000 of claims exceeding $10,000 individually. [Section 9.6]
The representations and warranties of VSA in the Merger Agreement expire on
the second anniversary of the Effective Time, except for the representations and
warranties with respect to VSA's financial statements, which expire at the
Effective Time. [10.7]
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Mark E. Craig, the President and Chief Executive Office and sole Director
of VSA has a number of contractual relationships with VSA that are described
below under "Information Concerning VSA -- Certain Transactions." The closing of
the Merger will result in the following:
- As a condition precedent to the Merger, Mr. Craig's loan to VSA will be
repaid by VSA and Mr. Craig's guarantee of VSA's indebtedness to Comerica
Bank will be released.
- Mr. Craig will enter into an employment agreement with EAI as described
below under "Employment Agreement."
- Mr. Craig's prior Royalty Agreement with VSA, which terminated on July 1,
1997, would be reinstated if the Merger is not consummated.
- The indebtedness of VSA Leasing, LLC, which is owned by Mr. Craig and his
wife, to VSA will be repaid as a condition precedent to the consummation
of the Merger.
EMPLOYMENT AGREEMENT
In connection with the Merger, EAI has agreed to enter into an employment
agreement with Mark E. Craig (the "Craig Employment Agreement"). The Craig
Employment Agreement, which will be entered into at Closing, will have a term of
two years and will include certain non-competition and confidentiality
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provisions. The Craig Employment Agreement provides that Mr. Craig will be
employed by EAI at an annual salary of $180,000 and that he is eligible for an
annual bonus based on set performance goals for VSA as a wholly owned subsidiary
of EAI. In addition, Mr. Craig may receive an annual performance bonus as
determined at the discretion of EAI. The Craig Employment Agreement also
requires that, (i) if Mr. Craig is terminated for any reason except for cause,
EAI must make severance payments to Mr. Craig equal to his monthly salary
payments and a continuation of benefits to the end of the term of the employment
agreement and (ii) if Mr. Craig is terminated for any reason except for cause
during the second year of the employment agreement, EAI must make severance
payments to Mr. Craig for a period of 12 months following his termination in an
amount equal to his annual salary and bonus in the year prior to termination.
The Craig Employment Agreement also provides for a term life insurance policy
and a car allowance. In addition, Mr. Craig will be provided a standard benefit
package as is provided to all other EAI employees.
REGISTRATION AND LISTING
EAI has agreed to register under the Securities Act, the shares of EAI
Common Stock to be issued in connection with the Merger and to use its
reasonable efforts to obtain all necessary state securities or "blue sky"
qualifications, permits and approvals required to consummate the transactions
contemplated by the Merger Agreement. VSA has agreed to cooperate with EAI in
taking such action. [Section 6.1]
EAI has agreed to cause the shares of EAI Common Stock to be issued in the
Merger to be approved for listing on the NNM, subject to official notice of
issuance, prior to the Effective Time. [Section 6.4]
THE ESOP
VSA established the Variation Systems Analysis, Inc. Employee Stock
Ownership Plan effective as of July 1, 1991, and amended and restated as of
August 25, 1993. As of the Record Date, the ESOP held approximately 8.92% of
outstanding VSA Common Stock (6,240 shares).
Participants with allocated shares who instruct the ESOP Trustee to vote
such shares of the Merger will have Merger Consideration credited to their
accounts. However, an ESOP participant's vested interest in his or her account
in the ESOP will not be diminished as a result of the Merger.
ESOP TRUSTEE
Comerica Bank, 411 W. Lafayette, MC 3431, Detroit, Michigan 48226, was
appointed to serve as the independent trustee of the ESOP effective as of June
9, 1992 and has continued to serve as such to the present date. For its services
to the ESOP in connection with the proposed Merger, the ESOP Trustee will be
reimbursed for its reasonable out-of-pocket expenses, including the fees of its
counsel. The fee and expenses of the independent trustee of the ESOP are payable
by and not contingent upon the closing the Merger.
ESOP EVALUATION
The ESOP Trustee retained First of Michigan Corporation ("FOMC") to provide
a valuation of the VSA Common Stock. As set forth herein, FOMC will rely,
without independent investigation, on the accuracy and completeness of the
information contained in this Prospectus/Information Statement and other
information furnished to it by VSA. The ESOP Trustee selected FOMC on the basis
of its ability to determine the value of the VSA Common Stock. The ESOP Trustee
considered, among other factors, FOMC's qualifications and previous experience
with ESOPs and its reputation in the banking and investment communities. No
limitations were placed on the scope of the firm's investigations.
VSA has agreed to pay FOMC a fee in an amount equal to $18,500. The fee
payable to FOMC is not contingent upon the consummation of the Merger.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary, based upon current law, is a general discussion of
certain federal income tax consequences of the Merger, assuming the Merger is
consummated as contemplated herein. This summary is
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based upon the Code, applicable regulations promulgated under the Code by the
Treasury Department ("Treasury Regulations"), administrative rulings and
judicial authority as of the date hereof, all of which are subject to change,
possibly with retroactive effect. Any such change could affect the continuing
validity of this summary.
This summary applies to holders of VSA Common Stock who hold their VSA
Common Stock as capital assets. This summary does not discuss all aspects of
federal income taxation that may be relevant to a particular holder of VSA
Common Stock in light of the holder's specific circumstances or to certain types
of holders subject to special treatment under the federal income tax laws
(including, for example, foreign persons, dealers in securities, holders who
acquired VSA Common Stock pursuant to the exercise of options or warrants or
otherwise as compensation, banks and other financial institutions, insurance
companies, tax exempt organizations or persons subject to the alternative
minimum tax), and it does not discuss any aspect of state, local, foreign or
other tax laws.
No ruling is being sought from the Internal Revenue Service as to the
anticipated tax consequences of the Merger. Further, this summary is not binding
on the Internal Revenue Service, and the Internal Revenue Service will not be
precluded from asserting contrary positions. CONSEQUENTLY, HOLDERS OF VSA COMMON
STOCK SHOULD CONSULT THEIR TAX ADVISORS AS TO THE TAX CONSEQUENCES TO THEM OF
THE MERGER, INCLUDING THE APPLICABILITY OF FEDERAL, STATE, LOCAL AND FOREIGN
INCOME AND OTHER TAX LAWS.
The Merger. Ernst & Young LLP has delivered an opinion that, subject to the
conditions stated in the opinion, the Merger will constitute, for federal income
tax purposes, a "reorganization" within the meaning of Section 368(a) of the
Code. The opinion of Ernst & Young LLP is based upon certain facts and
representations provided by the managements of EAI and VSA and by certain
shareholders of VSA to Ernst & Young LLP. Ernst & Young LLP has not been engaged
to, and will not, update its opinion for changes in facts or law occurring
subsequent to the date of the opinion.
In general, the "continuity of interest" test requires the owners of the
reorganized entity to receive and retain a meaningful equity interest in the
surviving entity. Effective for transactions occurring after January 28, 1998,
the Internal Revenue Service issued final and temporary regulations providing
rules for satisfying the continuity of interest requirement. These regulations
substantially liberalize the historic rules, generally providing that continuity
of interest is satisfied if a substantial part of the value of the proprietary
interest in the target corporation is preserved in the reorganization.
Generally, continuity of interest is not preserved to the extent that the
acquiring corporation acquires target stock for consideration other than
acquiring stock, or if, in connection with the plan of reorganization, the
acquiring stock is redeemed (or purchased by a related party). In addition,
continuity of interest is not preserved to the extent that, prior to and in
connection with the plan of reorganization, the target (or a related party)
acquires the stock with consideration other than stock of the target, or makes
an extraordinary distribution with respect to the stock. Sales by the target
shareholders of stock of the acquirer received in the transaction to unrelated
third parties occurring before or after a reorganization are disregarded.
Among other facts and representations provided by the managements of EAI
and VSA and by certain shareholders of VSA that underlie the opinion regarding
the status of the Merger as a reorganization for federal tax purposes are facts
and representations (a) that neither EAI nor a related person has any plan or
intention, in connection with the plan of reorganization, to acquire a
proprietary interest in VSA for consideration other than stock of EAI, or redeem
stock of EAI issued in exchange for a proprietary interest in VSA; (b) that
neither VSA nor a related person has any plan or intention, prior to and in
connection with the plan of reorganization, to redeem the stock of VSA, acquire
stock of VSA with consideration other than stock of VSA or EAI, or make an
extraordinary distribution with respect to the stock of VSA; (c) that VSA
following the Merger generally will own "substantially all" of the assets which
were owned by each of VSA and Sub as of the date that negotiations commenced
between VSA and EAI regarding the Merger; (d) that EAI has no plan or intent to
cause VSA to issue additional shares of EAI Common Stock after the Merger or
take any other action that would cause EAI to own less than 80% of the voting
stock of VSA and 80% of any other class of capital stock of VSA; (e) that
following the Merger the historic business of VSA will be
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<PAGE> 33
continued or a significant portion of VSA's assets will be used in a trade or
business; and (f) that there is no intercompany indebtedness existing between
EAI and VSA or between Sub and VSA that was issued, acquired, or will be settled
at a discount.
As a reorganization for United States federal income tax purposes, the
Merger will result in the following general federal income tax consequences:
1. No gain or loss will be recognized by EAI or VSA solely as a result
of the consummation of the Merger.
2. No gain or loss will be recognized by holders of VSA Common Stock
upon the surrender of shares of VSA Common Stock and the receipt of shares
of EAI Common Stock, except with respect to any cash received by a holder
of VSA Common Stock in lieu of fractional shares of EAI Common Stock.
3. The payment of cash in lieu of fractional share interests of EAI
Common Stock will be treated as if the fractional shares were distributed
as part of the exchange and then were redeemed by EAI. These cash payments
will be treated as distributions in full payment in exchange for the stock
redeemed, subject to the provisions and limitations of Section 302(a) of
the Code.
4. Each holder's aggregate tax basis in the EAI Common Stock received
in the Merger will equal such holder's aggregate tax basis in the VSA
Common Stock surrendered, decreased by the amount of any tax basis
allocable to any fractional share interest for which cash is received.
5. The holding period of EAI Common Stock received in the Merger will
include the holding period of the VSA Common Stock surrendered, provided
that the VSA Common Stock is held as a capital asset in the hands of the
holder thereof at the Effective Time of the Merger.
As noted above, no ruling is being requested from the Internal Revenue
Service in connection with the Merger, and the opinion required to be furnished
by Ernst & Young LLP as a condition to consummation of the Merger and the
discussion herein pertaining to certain anticipated tax consequences associated
with the Merger will neither be binding on the Internal Revenue Service nor
preclude it from asserting contrary positions. Additionally, if any facts or
representations provided by the managements of EAI and VSA and by certain
shareholders of VSA that form the basis for the opinion referred to above,
including the facts and representations regarding the satisfaction of the
continuity of interest requirement, do not conform to the facts associated with
the Merger, the validity of the opinion and the discussion contained herein
could be adversely affected. A successful challenge by the Internal Revenue
Service to the status of the Merger as a reorganization under Section 368(a) of
the Code under any circumstances, including by reason of a failure to satisfy
the continuity of interest requirement, would result in holders of VSA Common
Stock recognizing taxable income or loss with respect to the shares of VSA
Common Stock surrendered equal to the differences between the holder's tax basis
in such shares and the fair market value, as of the Effective Time of the
Merger, of the shares of EAI Common Stock and the cash received in the Merger.
In such event, a stockholder's aggregate basis in the shares of EAI Common Stock
received in the Merger would equal its fair market value and the holding period
for such shares would begin the day after the Merger.
Backup Withholding. Certain holders of VSA Common Stock may be subject to
backup withholding at a rate of 31% on cash payments received in lieu of
fractional shares of EAI Common Stock. Backup withholding will not apply,
however, to a stockholder who furnishes a correct taxpayer identification number
("TIN") and certifies, under penalties of perjury, that such stockholder is not
subject to backup withholding on a Substitute Form W-9 or is otherwise exempt
from backup withholding. If the correct TIN and certifications are not received,
a $50 penalty may be imposed on each holder of VSA Common Stock by the Internal
Revenue Service. VSA shareholders may also be required to certify that they are
"United States persons". A Substitute Form W-9 will be provided by EAI to each
former holder of VSA Common Stock after the Effective Time of the Merger. Ernst
& Young LLP has not provided an opinion with respect to the backup withholding
requirements on cash payments received in lieu of fractional shares of EAI
Common Stock.
Reporting Requirements. Holders of VSA Common Stock will be required to
attach a statement to their tax returns for the taxable year in which the Merger
is consummated that contains the information set forth in
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Treasury Regulations Section 1.368-3(b). The statement must include the holder's
tax basis in the VSA Common Stock surrendered and a description of the EAI
Common Stock received in the Merger. Ernst & Young LLP has not provided an
opinion with respect to these reporting requirements.
Federal Income Tax Consequences to ESOP Participants. Under the ESOP,
shares of VSA Common Stock will be surrendered by the ESOP Trustee in exchange
for shares of EAI Common Stock (and cash in lieu of any fractional share) and
such shares will be credited to the respective ESOP accounts of the ESOP
participants in the respective amounts determined by multiplying the numbers of
shares of VSA Common Stock, both whole and fractional, credited to such accounts
as of the Effective Time by the Exchange Ratio. Since such surrender and
exchange will have taken place without a distribution to an ESOP participant,
and since the ESOP is an exempt trust under Section 501(a) of the Code, any gain
realized by the ESOP Trust will not be taxable gain to ESOP participants at the
time of such surrender and exchange. Ernst & Young LLP has not provided an
opinion with respect to the tax consequences of the Merger on the ESOP Trust or
the ESOP participants.
THE DISCUSSION OF FEDERAL INCOME TAX CONSEQUENCES SET FORTH ABOVE IS FOR
GENERAL INFORMATION ONLY AND IS BASED ON EXISTING LAW AS OF THE DATE OF THIS
REGISTRATION STATEMENT. ERNST & YOUNG LLP HAS UNDERTAKEN NO OBLIGATION, AND WILL
NOT, UPDATE ITS OPINION FOR CHANGES IN FACTS OR LAW OCCURRING SUBSEQUENT TO THE
DATE OF THE OPINION. HOLDERS OF VSA COMMON STOCK ARE URGED TO CONSULT THEIR TAX
ADVISORS TO DETERMINE THE PARTICULAR TAX CONSEQUENCES TO THEM OF THE MERGER
(INCLUDING THE APPLICABILITY AND EFFECT OF FEDERAL, STATE, LOCAL, FOREIGN AND
OTHER TAX LAWS).
ACCOUNTING TREATMENT
The Merger is intended to qualify as a pooling of interests for accounting
and financial reporting purposes. Under this method of accounting, the recorded
historical cost basis of the assets and liabilities of EAI and VSA will be
carried forward to the operations of the combined companies at their recorded
amounts, results of operations of the combined companies will include the
results of operations of EAI and VSA for the entire fiscal period in which the
combination occurs and the historical results of operations of the separate
companies for fiscal years prior to the Merger will be combined and reported as
the results of operations of the combined companies.
Prior to the consummation of the Merger, EAI expects to receive a letter
from Ernst & Young LLP regarding that firm's concurrence with EAI management's
and VSA management's conclusions, respectively, that the Merger qualifies for
"pooling-of-interests" treatment for financial reporting purposes and that such
accounting treatment is in accordance with generally accepted accounting
principles. Certain events, including certain transactions with respect to EAI
Common Stock or VSA Common Stock by affiliates of EAI and VSA, respectively, may
prevent the Merger from qualifying as a pooling of interests for accounting and
financial reporting purposes. For information concerning certain restrictions to
be imposed on the transferability of VSA Common Stock to be received by
affiliates in order, among other things, to ensure the availability of
pooling-of-interests accounting treatment, see "Resale of EAI Common Stock
Issued in the Merger; Affiliates."
REGULATORY APPROVALS
EAI and VSA are aware of no governmental or regulatory approvals required
for consummation of the Merger, other than compliance with applicable securities
laws.
RESALE OF EAI COMMON STOCK ISSUED IN THE MERGER; AFFILIATES
The EAI Common Stock to be issued to VSA shareholders in connection with
the Merger will be freely transferable under the Securities Act, except EAI
Common Stock issued to any person deemed to be an affiliate of VSA for purposes
of Rule 145 under the Securities Act ("Rule 145"). Affiliates may not sell their
EAI Common Stock acquired in connection with the Merger except pursuant to an
effective registration
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statement under the Securities Act covering such shares, or in compliance with
Rule 145 or another applicable exemption from the registration requirements of
the Securities Act.
In addition, each person who is an affiliate of VSA will be required, as a
condition of Closing, to execute a letter pursuant to which they agree not to
dispose of any shares of EAI Common Stock (including shares acquired upon the
exercise of options) until financial statements reflecting thirty days of
combined operations of EAI and VSA are made publicly available by EAI.
INFORMATION FOR ESOP PARTICIPANTS
As of the Record Date, 6,240 shares (8.92%) of the outstanding VSA Common
Stock were owned by the ESOP. Eligible ESOP participants are being offered the
opportunity to instruct the ESOP Trustee as to whether to vote such
participants' allocated shares of VSA Common stock in favor of or against the
adoption of the Merger Agreement. To instruct the ESOP Trustee, an ESOP
participant should complete the ESOP Voting Instruction Card that accompanies
this Information Statement/Prospectus and return it to the ESOP Trustee, all in
accordance with the instructions set forth below.
Before completing and returning the ESOP Voting Instruction Card to the
ESOP Trustee, ESOP participants should read and consider carefully the entire
Information Statement/Prospectus.
ESOP PARTICIPANTS ELIGIBLE TO INSTRUCT THE ESOP TRUSTEE
Each participant in the ESOP to whose account shares of VSA Common Stock
have been allocated as of the Record Date (i.e., who is either employed by VSA
as of August 14, 1998 and has shares allocated to his or her ESOP account as of
that date, or is a former employee of VSA who has not received a final
distribution from the ESOP as of August 14, 1998) is eligible to instruct the
ESOP Trustee on the voting of those shares by completing, signing and timely
returning an ESOP Voting Instruction Card.
EFFECT OF ESOP PARTICIPANTS' INSTRUCTIONS
ESOP participants may instruct the ESOP Trustee to vote their allocated
shares of VSA Common Stock in favor of or against the adoption of the Merger
Agreement. Under the terms of the ESOP, subject to the ESOP Trustee's fiduciary
obligations described below, the ESOP Trustee will vote all allocated shares of
VSA Common Stock held in the ESOP as instructed by ESOP participants. The ESOP
plan and trust documents provide that the ESOP Trustee will vote unallocated
shares of VSA Common Stock and shares of VSA Common Stock for which no direction
is received from the ESOP participants in the same proportion (affirmative,
negative or abstain) as the shares for which it receives voting instruction from
participants, but only if and to the extent not inconsistent with Treasury
regulations or other applicable laws, rulings or regulations.
THE ESOP TRUSTEE'S FIDUCIARY OBLIGATIONS
The ESOP Trustee is subject to certain fiduciary obligations imposed on it
by the Employee Retirement and Income Security Act of 1974, as amended
("ERISA"). In general, the ESOP Trustee will be obligated under the ESOP and the
applicable provisions under ERISA to follow the ESOP participants' vote, to the
extent described above, but only if and to the extent not inconsistent with
Treasury regulations or other applicable laws, rulings or regulations.
Therefore, it is possible that, notwithstanding the outcome of the ESOP
participants' instructions, the ESOP Trustee could, in the exercise of its
fiduciary obligations, decide to vote, or not to vote, all of the outstanding
shares of VSA Common Stock held in the ESOP Trust for the adoption of the Merger
Agreement.
As of the date of this Information Statement/Prospectus, the ESOP Trustee
has not made a final determination on whether the consummation of the Merger in
accordance with the vote of the ESOP participants would be contrary to its
fiduciary obligations of ERISA. The ESOP Trustee will not make this final
determination until the date of the Meeting; however, the ESOP Trustee is not
presently aware of any
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fact or circumstance which would cause it to vote shares of VSA Common Stock
other than as provided for in the ESOP plan and trust documents.
HOW TO INSTRUCT THE ESOP TRUSTEE
An ESOP participant who wishes to vote his or her allocated shares of VSA
Common Stock must properly complete and timely return the ESOP Voting
Instruction Card. To do so, after reading the Prospectus/Information Statement,
an ESOP participant should:
1. Mark, date and sign the ESOP Voting Instruction Card; and
2. Mail the ESOP Voting Instruction Card in the accompanying
postage-paid, pre-addressed envelope so that it will be received by the
ESOP Trustee no later than 5:00 p.m. Eastern Time, on September , 1998.
ESOP Voting Instruction Cards also may be sent to the ESOP Trustee by
overnight mail (at the ESOP's participant's expense), or by telecopier, to
the following address:
Comerica Bank
As Trustee of the Variation Systems Analysis, Inc.
Employee Stock Ownership Trust
Mail Code 3431
P.O. Box 75000
Detroit, Michigan 48275-3431
Attn.: Kim O'Connor
Telecopier: 313-222-7170
In order to be effective, an ESOP Voting Instruction Card must be received by
the ESOP Trustee no later than 5:00 p.m. Eastern Time, on September , 1998.
FAILURE TO SIGN, COMPLETE OR RETURN AN ESOP VOTING INSTRUCTION CARD
If an ESOP participant fails to sign or timely return an ESOP Voting
Instruction Card, or if an ESOP participant properly signs and timely returns an
ESOP Voting Instruction Card but does not specifically mark a box on the ESOP
Voting Instruction Card, the ESOP Trustee will consider the shares of VSA Common
Stock represented by such ESOP Voting Instruction Card to be shares with respect
to which no instruction has been submitted. Therefore, if an ESOP participant
does not want the ESOP Trustee to consider his or her allocated shares as shares
with respect to which no instruction has been submitted, the ESOP participant
must specifically mark a box on the ESOP Voting Instruction Card, sign the ESOP
Voting Instruction Card, and return it to the ESOP Trustee so that the ESOP
Trustee receives it prior to 5:00 p.m. Eastern Time, on September , 1998.
An ESOP participant who decides to change his or her vote after having
submitted an ESOP Voting Instruction Card must obtain a new card by contracting
the ESOP Trustee at the address listed above or by telephoning the ESOP Trustee
at (313) 222-0055. By properly completing and timely returning the new ESOP
Voting Instruction Card, an ESOP participant's previously submitted ESOP Voting
Instruction Card will be revoked automatically.
An ESOP participant may also revoke an ESOP Voting Instruction Card by
notifying the ESOP Trustee in writing of the ESOP participant's decision to
revoke, but, if a new ESOP Voting Instruction Card is not timely received by the
ESOP Trustee, the ESOP participant's allocated shares covered by the revoked
ESOP Voting Instruction Card will be considered by the ESOP Trustee to be shares
with respect to which no instruction has been submitted. After 5:00 p.m. Eastern
Time, on September , 1998, no ESOP Voting Instruction Card will be accepted,
and no ESOP Voting Instruction Card will be permitted to be changed or revoked.
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CONFIDENTIALITY
Each ESOP Voting Instruction Card received by the ESOP Trustee will be held
in confidence by the ESOP Trustee and will not be released or divulged to
representatives of VSA or EAI. However, although no individual ESOP
participant's vote will be disclosed, the ESOP Trustee will inform
representatives of VSA as to the total number of allocated and unallocated
shares of VSA Common Stock voted in favor of, and against the adoption of the
Merger Agreement. Any participant in the ESOP should contact the ESOP Trustee if
he or she has been subject to pressure or coercion by any party or if he or she
is concerned about the confidentiality of instructions submitted by the ESOP
Trustee.
EAI COMPARATIVE PER SHARE PRICES AND DIVIDEND POLICY
EAI Common Stock is traded on the NNM under the symbol "EAII." The
following table sets forth the high and low closing prices as reported by NNM
for the periods indicated since EAI's initial public offering of EAI Common
Stock on February 29, 1996.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1998:
First quarter............................................... $45.75 $28.33
Second quarter.............................................. $61.00 $42.00
Third quarter (through August 13, 1998)..................... $69.75 $54.00
1997:
First quarter............................................... $17.17 $14.83
Second quarter.............................................. $24.67 $14.33
Third quarter............................................... $28.17 $21.83
Fourth quarter.............................................. $33.33 $23.17
1996:
First quarter (from February 29, 1996)...................... $17.50 $12.83
Second quarter.............................................. $15.83 $12.50
Third quarter............................................... $16.67 $10.67
Fourth quarter.............................................. $17.83 $14.50
</TABLE>
DIVIDEND POLICY
EAI has not declared or paid any cash dividends on the EAI Common Stock
since its formation and does not currently intend to declare or pay any cash
dividends on the EAI Common Stock. EAI intends to retain future earnings for
reinvestment in its business. Any future determination by EAI to pay cash
dividends on the EAI Common Stock will be at the discretion of EAI's Board of
Directors and will be dependent upon the EAI's operating results, financial
condition, contractual restrictions and other factors deemed relevant by EAI's
Board of Directors.
INFORMATION CONCERNING EAI AND SUB
EAI specializes in developing visualization technology and products that
address the productivity, communication, education and entertainment needs of
its clients. EAI utilizes its core technical competencies in high speed, real
time graphics, CAD/CAE/CAM interfaces, distributed databases and
Internet/intranet communications to provide solutions through two product lines:
product visualization software and interactive software. Utilizing its broad
base of technology, in conjunction with its extensive library of computer-
generated animation assets, EAI offers products that allow customers to reduce
time to market, decrease product development costs and obtain realistic, high
quality 3D animations at reasonable prices within a short time frame.
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EAI has entered into an Agreement and Plan of Merger with Transom
Technologies, Inc., a Delaware corporation ("Transom"), dated as of July 29,
1998, pursuant to which Transom has agreed to merge with and into EAI (the
"Transom Merger"). Pursuant to the Transom Merger, the stockholders and
optionholders of Transom will receive an aggregate of 205,000 shares of EAI
Common Stock. The Transom Merger is subject to approval by the Transom
stockholders and other normal closing conditions.
Transom is a provider of human modeling and simulation software. Transom
revenues for the twelve months ended June 30, 1998 were approximately $1.8
million. EAI will account for the Transom Merger as a pooling of interests. See
"Unaudited Pro Forma Condensed Combined Financial Statements."
EAI was incorporated in 1988 in Iowa and, in December 1995, reincorporated
in Delaware. EAI's executive offices are located at 2321 North Loop Drive, Ames,
Iowa 50010 and its telephone number is (515) 296-9908; its Internet e-mail
address is [email protected]; and its World Wide Web address is www.eai.com.
Sub was formed in July 1998 for the sole purpose of completing the
transactions contemplated in the Merger Agreement. Sub engages in no other
business. The mailing address of Sub's principal executive offices is c/o
Engineering Animation, Inc., 2321 North Loop Drive, Ames, Iowa 50010 and its
telephone number is (515) 296-9908.
INFORMATION CONCERNING VSA
VSA specializes in providing Dimensional Management software technology and
consulting services. Dimensional Management is an engineering methodology
combined with software tools used to improve quality, reduce costs, and reduce
concept to market time of complex assemblies. The VSA-GDT and VSA-3D software
products and related services are used to clearly define dimensional
requirements at the beginning of a product design cycle, simulate manufacturing
and assembly variation, and to predict if the design, manufacturing and assembly
process as specified, optimally achieves product requirements. VSA's variation
simulation software provides the engineering and manufacturing team with the
ability to determine the root cause of manufacturing problems related to
variation during the design phase of a product, thus significantly reducing
initial production start up problems.
VSA was incorporated in 1981 with headquarters located at 300 Maple Park
Blvd., St. Clair Shores Michigan. World-wide web access is at www.vsa.com.
INDUSTRY BACKGROUND
Until the availability of 3D CAD product data, engineers would design
products in 2D and assign manufacturing tolerances to each component in an
assembly based on previous experience. One Dimensional (1D) hand calculations
were performed in an attempt to predict if the component parts would assemble
when mass produced. Typically, this approach is not accurate enough to identify
build interference problems. The design is released, manufacturing attempts to
build the product during "prototype" and several "no build" conditions exist,
causing numerous engineering changes. Engineering changes after manufacturing
and assembly tools are produced cause significant cost and timing delays. In
many cases several prototype phases are required to make the product design
production ready.
Today's competitive environment does not allow for the cost and time
necessary to modify a design late in the design cycle to meet manufacturing and
assembly requirements. The design and manufacturing process needs to be
developed simultaneously, with the goal of manufacturing the product correctly
the first time.
The recent advancements in large assembly manipulation and Digital
Manufacturing provides the capability for VSA's variation simulation technology
(VSA-3D and VSA-GDT) to realistically predict production build. VSA provides the
ability to simulate the manufacturing and assembly variation during the early
stages of design to predict the amount and causes of variation before production
tools are made. Generally, there are three ways to predict if the design and
process of a product will meet the requirements: build many products in a
process of trial and error, make educated estimates, or perform a comprehensive
simulation. Improved quality, reduced cost, and reduction in prototypes (concept
to market time) are the result of implementing these tools.
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PRODUCTS AND SERVICES
VSA provides Dimensional Management Consulting services on a world-wide
basis from its offices in Michigan, California, the U.K. and Germany. A
significant portion of VSA's 180 consultants are located at customer sites
implementing the Dimensional Management process. VSA's software is directly
integrated to the four leading CAD systems, Pro Engineer, CATIA, Unigraphics,
and I-DEAS. VSA's two main products include:
VSA-GDT, a component level geometric dimensioning and tolerancing tool used
to analyze the tolerancing scheme on a component part to determine if it is
correct according to industry standards. VSA has a patent on the techniques used
in this product.
VSA-3D, a comprehensive variation simulation analysis tool that provides
the ability to add realistic manufacturing and assembly variation to the Digital
Manufacturing environment. VSA-3D statistically predicts how much variation will
occur in an assembly and identifies the major contributors.
CUSTOMERS MARKETING AND SALES
VSA customers include the world's leading automotive, aerospace, consumer
products, medical equipment, heavy construction, and computer manufacturing
industries. VSA's products and services are sold directly through our sales
teams in the U.S. and Europe as well as through original equipment manufacturer
(OEM) agreements with our CAD partners.
EMPLOYEES
VSA has grown from its inception to a work force of 225 employees.
MARKET FOR SHARES AND DIVIDENDS
There is no established public trading market for the VSA Common Stock. As
of the date of this Information Statement/Prospectus, there are 43 holders of
record of VSA Common Stock. Following the Merger, EAI will be the sole
shareholder of VSA. VSA has not declared or paid any cash or other dividends
since its formation.
SECURITY OWNERSHIP
The following table sets forth, as of August 14, 1998, the number and
percentage of outstanding shares beneficially owned by each person known to VSA
to own beneficially more than 5% of the outstanding shares of VSA Common Stock,
by each director and named executive officer of VSA, and by all the directors
and executive officers of VSA as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP(#)(1) PERCENT(%)(2)
------------------------------------ ----------------- -------------
<S> <C> <C>
VSA COMMON STOCK
Mark Craig, President and Chief Executive Officer and
Director.................................................. 56,515 80.8%
Mark Iannuzzi, Vice President Research and Development...... 2,229 3.2%
Colin Wearring, Vice President Software Development......... 1,674 2.4%
Rick Heggem, Vice President Western Division................ 772 1.1%
Mitch Giulietti, Managing Director, VSA Ltd................. 308 *
All directors and officers as a group (9 persons)........... 63,063 90.1%
</TABLE>
- -------------------------
* Less than one percent.
(1) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect to
securities. Except as otherwise indicated, the persons named in the table
above have sole voting and investment power with respect to all shares of
VSA Common Stock shown as beneficially owned by them.
(2) Applicable percentage ownership is based on 69,970 shares of VSA Common
Stock, as of August 14, 1998.
32
<PAGE> 40
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
consolidated financial data.
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30,
--------------
1998 1997
---- ----
<S> <C> <C>
Net revenues................................................ 100% 100%
Cost of net revenues........................................ 64% 70%
Gross margin................................................ 36% 30%
Sales and marketing......................................... 5% 4%
General and administrative.................................. 9% 8%
Research and development.................................... 19% 16%
Operating income............................................ 4% 2%
Other income (expense)...................................... (1)% (1)%
Income before income taxes.................................. 3% 1%
Income taxes................................................ 1% 1%
Net income.................................................. 2% 0%
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------
1998 CHANGE 1997
---- ------ ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net revenues................................................ $18,142 7% $16,936
Cost of net revenues........................................ $11,528 (3)% $11,855
Gross margin................................................ $ 6,614 30% $ 5,081
Sales and marketing......................................... $ 891 21% $ 737
General and administrative.................................. $ 1,646 16% $ 1,423
Research and development.................................... $ 3,441 30% $ 2,638
Operating income............................................ $ 636 125% $ 283
Other income (expense)...................................... $ (143) 39% $ (103)
Income before income taxes.................................. $ 493 174% $ 180
Income taxes................................................ $ 217 70% $ 128
Net income.................................................. $ 276 431% $ 52
</TABLE>
Year Ended June 30, 1998 Compared to Year Ended June 30, 1997
Net Revenues. VSA net revenues include product licenses, consulting, and
product maintenance. Product license revenues are recognized upon shipment to
customers. Revenues from product maintenance are recognized on a monthly basis
over the 12 month period of the maintenance contract. Consulting services are
recognized on a percent of contract completion basis. Net revenues increased 7%
to $18.1 million in 1998 from $16.9 million in 1997. A 47% increase in software
product revenue occurred during the period resulting from the release of VSA's
next generation product line directly integrated with the four leading CAD
products, CATIA, Unigraphics, Pro-Engineer, and I-DEAS.
Cost of Net Revenues. The cost of net revenues decreased slightly (3%) to
$11.5 million in 1998 from $11.9 million in 1997. A reduction in salary expense
due to a consolidation in the engineering consulting area resulted in this
reduction.
Sales and Marketing Expenses. Sales and marketing expenses increased 21% to
$ 0.9 million in 1998 from $0.7 million in 1997. The increase was attributed to
an increase in marketing events associated with the release of VSA's CAD
integrated products and the addition of sales personnel.
General and Administrative Expenses. General and administrative expenses
increased 16% to $1.6 million in 1998 from $1.4 million in 1997. Increased
administrative costs related to expanding offices in Germany
33
<PAGE> 41
and the U.K. and the addition of personnel in the administrative group for
shipment and tracking of increased product sales contributed to this increase.
Research and Development. Research and development increased 30% to $3.4
million in 1998 from $2.6 million in 1997. VSA expanded its research and
development significantly to support the integration to I-DEAS, Unigraphics, and
CATIA during the period. Also, increased spending occurred in VSA's core product
related to new technology in optimization and assembly methods.
LIQUIDITY AND CAPITAL RESOURCES
VSA has financed its operations through internally generated cash flow and
debt financing. Cash and cash equivalents were $147,000 and $238,000 at June 30,
1998 and 1997, respectively.
Net cash used by operating activities for the year ended June 30, 1998 was
$337,000. Net cash provided by operating activities for the year ended June 30,
1997 was $502,000.
VSA has a demand promissory note (revolving basis) bearing interest at
prime less 0.25% and secured by all assets of the company. On April 29, 1998,
VSA amended its line of credit agreement with Comerica Bank to increase the
total amount available under the line to $2.5 million from $2.0 million. Amounts
outstanding in excess of $2.0 million are personally guaranteed by the majority
shareholder. In no event will the personal guarantee exceed $0.5 million.
Advances against the line amounted to $1.9 million at June 30, 1998 and $0.53
million at June 30, 1997.
VSA has a demand promissory note bearing interest at 10% with its majority
shareholder. The amount outstanding at June 30, 1998 was $0.54 million, at June
30, 1997 was $1.1 million. All interest due is paid by June 30 of each year.
MARKET RISK
VSA does not have material exposure to qualitative and quantitative market
risks.
CERTAIN TRANSACTIONS
On July 1, 1994, Mark Craig, the President and Chief Executive and the sole
director of VSA, and VSA entered into a Royalty Agreement whereby Mr. Craig
assigned technology to VSA in exchange for a royalty, which consisted of a
$500,000 lump sum payment and an annual royalty equal to 5% of the annual gross
sales of VSA for a period of ten years. On January 1, 1996, the Royalty
Agreement was amended to increase the term from ten years to 17 years and to
decrease the royalty percentage from 5% to 2.5%. The Royalty Agreement was
terminated by the parties effective July 1, 1997. However, if the Merger is not
consummated, the Royalty Agreement will be reinstated effective July 1, 1997.
In addition, as documented by a Loan Agreement dated June 30, 1998, Mr.
Craig has loaned VSA the sum of $427,028.35 with an interest rate of 10%. This
indebtedness is to be repaid as a condition precedent to the consummation of the
Merger.
Also, there is a leasing arrangement in place between VSA and VSA Leasing,
LLC, which is owned by Mr. Craig and his wife. Under this arrangement, VSA
Leasing has leased an aircraft to VSA under the following terms: (i) VSA pays
all costs associated with maintaining the aircraft; (ii) VSA pays a flat monthly
lease payment, which is equal to the depreciation costs and financing costs of
the aircraft; and (iii) VSA is responsible for paying all operational costs with
respect to the aircraft.
On April 29, 1998, Mr. Craig executed and delivered a Guaranty on behalf of
VSA to Comerica Bank with respect to VSA's revolving loan agreement with
Comerica Bank. As a condition precedent to the consummation of the Merger, the
Guaranty will be released.
34
<PAGE> 42
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following Unaudited Pro Forma Condensed Combined Balance Sheet as of
June 30, 1998, and the related Unaudited Pro Forma Condensed Combined Statements
of Income for the six months ended June 30, 1998 and each of the three years in
the period ended December 31, 1997, give effect to the Merger as if it had
occurred on the first day of the earliest period presented. The Unaudited Pro
Forma Combined Statement of Operations includes the results of the Sense8
acquisition as if it had occurred as of the beginning of 1997 and the results of
the Transom acquisition as if it had occurred on October 7, 1996. The purchase
of Sense8 was effective June 17, 1998. EAI signed a definitive agreement to
acquire Transom on July 29, 1998 with the transaction expected to close during
the third quarter of 1998. The historical EAI results include the results of
Sense8 only from June 17, 1998. This pro forma information has been prepared
utilizing the historical consolidated financial statements of EAI and VSA and
should be read in conjunction with the historical financial statements and notes
thereto, which are incorporated by reference herein for EAI and which are
appearing elsewhere herein for VSA. The fiscal year ends on June 30 for VSA and
March 31 for Transom; therefore, unaudited results for the six months ended June
30, 1998, the calendar years ended December 31, 1997, 1996 and 1995 for VSA and
the six months ended June 30, 1998 and the calendar year ended December 31, 1997
and the period ended October 7, 1996 to December 31, 1996 for Transom have been
combined with Sense8's unaudited results for the period January 1, 1998 to June
16, 1998 and audited results for the year ended December 31, 1997 and EAI's
unaudited results for the six months ended June 30, 1998 and audited results for
the years ended December 31, 1997, 1996 and 1995. These Unaudited Pro Forma
Condensed Combined Financial Statements are presented for illustrative purposed
only and are not necessarily indicative of the operating results or financial
position that would have occurred if the Sense8 and Transom acquisitions or the
Merger had been consummated as of the beginning of the periods presented or as
of the dates presented, nor are they necessarily indicative of future operating
results or financial position.
These Unaudited Pro Forma Condensed Combined Financial Statements are based
on the pooling-of-interests method of accounting for the Merger and Transom
acquisition and the purchase method of accounting for the Sense8 acquisition.
The pro forma adjustments are described in the accompanying notes.
35
<PAGE> 43
UNAUDITED PRO FORMA
COMBINED BALANCE SHEET
JUNE 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
---------------- PRO FORMA PRO FORMA HISTORICAL PRO FORMA PRO FORMA
EAI VSA ADJUSTMENTS COMBINED TRANSOM ADJUSTMENTS COMBINED
--- --- ----------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................... $14,393 $ 147 $14,540 $1,594 $16,134
Short-term investments...................... 17,280 17,280 17,280
Accounts receivable, net:
Billed.................................... 17,051 4,170 21,221 679 21,900
Unbilled.................................. 11,504 691 12,195 12,195
Deferred income taxes....................... 701 701 701
Prepaid expenses and other assets........... 1,917 159 2,076 14 2,090
------- ------ ------- ------ -------
Total current assets.................... 62,846 5,167 68,013 2,287 70,300
Property and equipment, net................... 14,571 641 15,212 675 15,887
Other assets:
Note receivable............................. 1,408 1,408 1,408
Software development costs, net............. 1,384 1,384 1,384
Deferred income taxes....................... 652 111 763 949(a) 1,712
Goodwill, net............................... 1,655 1,655 1,655
Other....................................... 1,624 74 1,698 68 1,766
------- ------ ------- ------ ------- -------
Total assets............................ $84,140 $5,993 $90,133 $3,030 $ 949 $94,112
======= ====== ======= ====== ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................ $ 5,123 $ 131 $ 5,254 $ 81 $ 5,335
Accrued compensation and other accrued
expenses.................................. 4,450 1,757 3,500(b) 9,707 180 1,500(b) 11,387
Deferred revenue............................ 1,641 1,641 192 1,833
Current portion long-term debt and lease
obligations............................... 165 1,917 2,082 83 2,165
Income taxes payable........................ 1,368 352 1,720 1,720
------- ------ ------ ------- ------ ------- -------
Total current liabilities............... 12,747 4,157 3,500 20,404 536 1,500 22,440
Long-term debt and lease obligations due after
one year.................................... 1,517 543 2,060 141 2,201
Other liabilities............................. 417 417 417
Stockholders' equity.......................... 69,876 876 (3,500)(b) 67,252 2,353 949(a) 69,054
(1,143)(d) (1,500)(b)
1,143(d) (4,853)(c)
4,853(c)
------- ------ ------ ------- ------ ------- -------
Total liabilities and stockholders'
equity................................ $84,140 $5,993 $ 0 $90,133 $3,030 $ 949 $94,112
======= ====== ====== ======= ====== ======= =======
</TABLE>
36
<PAGE> 44
UNAUDITED PRO FORMA
COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
----------------- PRO FORMA PRO FORMA HISTORICAL PRO FORMA PRO FORMA HISTORICAL
EAI SENSE8 ADJUSTMENTS COMBINED VSA ADJUSTMENTS COMBINED TRANSOM
--- ------ ----------- --------- ---------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues................... $33,711 $ 821 $(210)(e) $34,322 $9,749 $44,071 $1,094
Cost of revenues............... 9,612 460 (210)(e) 9,862 5,938 15,800 10
------- ------- ----- ------- ------ ------- ------
Gross profit 24,099 361 0 24,460 3,811 28,271 1,084
Operating expenses:
Sales and marketing............ 9,393 493 9,886 430 10,316 520
General and administrative..... 3,303 1,308 58(f) 4,669 841 5,510 464
Research and development....... 5,067 398 5,465 1,746 7,211 785
Acquisition and non-recurring
charges....................... 13,329 13,329 13,329
------- ------- ----- ------- ------ ------- ------
Total operating expenses...... 31,092 2,199 58 33,349 3,017 36,366 1,769
------- ------- ----- ------- ------ ------- ------
Operating income (loss)....... (6,993) (1,838) (58) (8,889) 794 (8,095) (685)
Other income (expense)......... 1,109 (207) 902 (83) 819 (3)
------- ------- ----- ------- ------ ------- ------
Income (loss) before income
taxes....................... (5,884) (2,045) (58) (7,987) 711 (7,276) (688)
Income tax expense............. 1,215 1,215 322 1,537
------- ------- ----- ------- ------ ------- ------
Net income (loss) before
minority interest............. (7,099) (2,045) (58) (9,202) 389 (8,813) (688)
Minority interest..............
------- ------- ----- ------- ------ -- ------- ------
Net income (loss)............. $(7,099) $(2,045) $ (58) $(9,202) $ 389 $0 $(8,813) $ (688)
======= ======= ===== ======= ====== == ======= ======
Earnings (loss) per share
Basic......................... $ (0.71) $ (0.90) $ (0.83)
======= ======= =======
Diluted....................... $ (0.71) $ (0.90) $ (0.83)
======= ======= =======
Weighted average shares
outstanding................... 10,066 10,211 10,633
======= ======= =======
Weighted average shares
outstanding and assumed
conversion.................... 10,066 10,211 10,633
======= ======= =======
<CAPTION>
PRO FORMA PRO FORMA
ADJUSTMENTS COMBINED
----------- ---------
<S> <C> <C>
Net revenues................... $ (75)(e) $45,090
Cost of revenues............... (75)(e) 15,735
----- -------
Gross profit 0 29,355
Operating expenses:
Sales and marketing............ 10,836
General and administrative..... 5,974
Research and development....... 7,996
Acquisition and non-recurring
charges....................... 13,329
----- -------
Total operating expenses...... 38,135
----- -------
Operating income (loss)....... 0 (8,780)
Other income (expense)......... 816
----- -------
Income (loss) before income
taxes....................... 0 (7,964)
Income tax expense............. (261)(a) 1,276
----- -------
Net income (loss) before
minority interest............. 261 (9,240)
Minority interest..............
----- -------
Net income (loss)............. $ 261 $(9,240)
===== =======
Earnings (loss) per share
Basic......................... $ (0.85)
=======
Diluted....................... $ (0.85)
=======
Weighted average shares
outstanding................... 10,838
=======
Weighted average shares
outstanding and assumed
conversion.................... 10,838
=======
</TABLE>
37
<PAGE> 45
UNAUDITED PRO FORMA
COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA HISTORICAL PRO FORMA PRO FORMA HISTORICAL
EAI SENSE8 ADJUSTMENTS COMBINED VSA ADJUSTMENTS COMBINED TRANSOM
--- ------ ----------- --------- ---------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues................ $49,717 $ 3,988 $ (115)(e) $ 53,590 $17,015 $ 70,605 $ 950
Cost of revenues............ 13,332 1,095 (3)(e) 14,424 11,797 26,221 20
------- ------- ------- -------- ------- -------- -------
Gross profit............... 36,385 2,893 (112) 39,166 5,218 44,384 930
Operating expenses:
Sales and marketing......... 15,406 1,911 17,317 876 18,193 795
General and
administrative............. 5,478 1,366 115(f) 6,959 1,522 8,481 842
Research and development.... 7,068 1,118 (65)(e) 8,121 3,108 11,229 1,015
Acquisition and
non-recurring charges...... 8,831 9,080(g) 17,911 17,911
------- ------- ------- -------- ------- -------- -------
Total operating expenses... 36,783 4,395 9,130 50,308 5,506 55,814 2,652
------- ------- ------- -------- ------- -------- -------
Operating income (loss).... (398) (1,502) (9,242) (11,142) (288) (11,430) (1,722)
Other income (expense)...... 1,522 (185) 1,337 (100) 1,237 46
------- ------- ------- -------- ------- -------- -------
Income (loss) before income
taxes.................... 1,124 (1,687) (9,242) (9,805) (388) (10,193) (1,676)
Income tax expense.......... 2,772 2,772 (175) 2,597
------- ------- ------- -------- ------- -------- -------
Net income (loss) before
minority interest.......... (1,648) (1,687) (9,242) (12,577) (213) (12,790) (1,676)
Minority interest........... (49) (49) (49)
------- ------- ------- -------- ------- -- -------- -------
Net income (loss).......... $(1,697) $(1,687) $(9,242) $(12,626) $ (213) $0 $(12,839) $(1,676)
======= ======= ======= ======== ======= == ======== =======
Earnings (loss) per share
Basic...................... $ (0.19) $ (1.41) $ (1.37)
======= ======== ========
Diluted.................... $ (0.19) $ (1.41) $ (1.37)
======= ======== ========
Weighted average shares
outstanding................ 8,770 8,928 9,350
======= ======== ========
Weighted average shares
outstanding and assumed
conversion................. 8,770 8,928 9,350
======= ======== ========
<CAPTION>
PRO FORMA PRO FORMA
ADJUSTMENTS COMBINED
----------- ---------
<S> <C> <C>
Net revenues................ $(148)(e) $ 71,407
Cost of revenues............ (148)(e) 26,093
----- --------
Gross profit............... 0 45,314
Operating expenses:
Sales and marketing......... 18,988
General and
administrative............. 9,323
Research and development.... 12,244
Acquisition and
non-recurring charges...... 17,911
----- --------
Total operating expenses... 58,466
----- --------
Operating income (loss).... 0 (13,152)
Other income (expense)...... 1,283
----- --------
Income (loss) before income
taxes.................... 0 (11,869)
Income tax expense.......... (637)(a) 1,960
----- --------
Net income (loss) before
minority interest.......... 637 (13,829)
Minority interest........... (49)
----- --------
Net income (loss).......... $ 637 $(13,878)
===== ========
Earnings (loss) per share
Basic...................... $ (1.45)
========
Diluted.................... $ (1.45)
========
Weighted average shares
outstanding................ 9,555
========
Weighted average shares
outstanding and assumed
conversion................. 9,555
========
</TABLE>
38
<PAGE> 46
UNAUDITED PRO FORMA
COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
FOR THE PERIOD
HISTORICAL OCTOBER 7, 1996 TO
----------------- PRO FORMA PRO FORMA DECEMBER 31, 1996 PRO FORMA PRO FORMA
EAI VSA ADJUSTMENTS COMBINED TRANSOM ADJUSTMENTS COMBINED
--- --- ----------- --------- ------------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues.......... $27,189 $16,887 $44,076 $ 19 $44,095
Cost of revenues...... 7,277 11,417 18,694 13 18,707
------- ------- ------- ----- -------
Gross profit..... 19,912 5,470 25,382 6 25,388
Operating expenses:
Sales and marketing... 9,799 850 10,649 38 10,687
General and
administrative...... 3,041 1,537 4,578 39 4,617
Research and
development......... 3,438 2,400 5,838 63 5,901
Acquisition and non-
recurring charges...
------- ------- ------- ----- -------
Total operating
expenses......... 16,278 4,787 21,065 140 21,205
------- ------- ------- ----- -------
Operating income
(loss)........... 3,634 683 4,317 (134) 4,183
Other income
(expense)........... 987 (102) 885 (1) 884
------- ------- ------- ----- -------
Income (loss) before
income taxes..... 4,621 581 5,202 (135) 5,067
Income tax expense.... 1,744 231 1,975 (51)(a) 1,924
------- ------- ------- ----- ---- -------
Net income (loss)
before minority
interest............ 2,877 350 3,227 (135) 51 3,143
Minority interest..... (310) (310) (310)
------- ------- -- ------- ----- ---- -------
Net income (loss)... $ 2,567 $ 350 $0 $ 2,917 $(135) $ 51 $ 2,833
======= ======= == ======= ===== ==== =======
Earnings (loss) per
share Basic......... $ 0.35 $ 0.37 $ 0.35
======= ======= =======
Diluted............. $ 0.30 $ 0.32 $ 0.31
======= ======= =======
Weighted average
shares
outstanding......... 7,432 7,854 8,059
======= ======= =======
Weighted average
shares outstanding
and assumed
conversion.......... 8,648 9,070 9,275
======= ======= =======
</TABLE>
39
<PAGE> 47
UNAUDITED PRO FORMA
COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
-------------------- PRO FORMA PRO FORMA
EAI VSA ADJUSTMENTS COMBINED
--- --- ----------- ---------
<S> <C> <C> <C> <C>
Net revenues........................................ $12,249 $12,618 $24,867
Cost of revenues.................................... 3,100 8,361 11,461
------- ------- -------
Gross profit...................................... 9,149 4,257 13,406
Operating expenses:
Sales and marketing................................. 3,573 663 4,236
General and administrative.......................... 2,276 1,088 3,364
Research and development............................ 1,992 1,807 3,799
Acquisition and non-recurring charges............... 2,520 2,520
------- ------- -------
Total operating expenses..................... 10,361 3,558 13,919
------- ------- -------
Operating income (loss)...................... (1,212) 699 (513)
Other income (expense).............................. (158) (40) (198)
------- ------- -------
Income (loss) before income taxes............ (1,370) 659 (711)
Income tax expense.................................. 392 392
------- ------- -------
Net income (loss) before minority interest.......... (1,762) 659 (1,103)
Minority interest................................... (128) (128)
------- ------- --- -------
Net income (loss)............................ $(1,890) $ 659 $-- $(1,231)
======= ======= === =======
Earnings (loss) per share
Basic............................................. $ (0.39) $ (0.24)
======= =======
Diluted........................................... $ (0.39) $ (0.24)
======= =======
Weighted average shares outstanding................. 4,805 5,227
======= =======
Weighted average shares outstanding and assumed
conversion........................................ 4,805 5,227
======= =======
</TABLE>
40
<PAGE> 48
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
CONDENSED COMBINED FINANCIAL STATEMENTS
(a) To reflect the income tax benefit that would be recognized if the
Transom Merger had occurred at the beginning of the earliest period presented.
The adjustment is based on the combined tax rate of the companies and the
elimination of the valuation allowance for deferred tax assets of Transom.
(b) To record estimated one-time merger-related charges for the Merger and
Transom Merger. These expenses include outside accounting and legal fees and
various other costs and filing fees. These charges will be recognized at the
time the VSA and Transom mergers are consummated as required under the
pooling-of-interests accounting method.
(c) To record the exchange of Transom common stock for EAI Common Stock.
(d) To record the exchange of VSA Common Stock for EAI Common Stock.
(e) To eliminate intercompany revenue, expense and cost of sales.
(f) To reflect the amortization of goodwill related to the Sense8
transaction.
(g) To reflect the write-off of in-process technology related to the Sense8
transaction.
41
<PAGE> 49
RIGHTS OF EAI STOCKHOLDERS AND VSA SHAREHOLDERS
DESCRIPTION OF EAI STOCK
The authorized capital stock of EAI consists of 60,000,000 shares of EAI
Common Stock and 20,000,000 shares of preferred stock, $0.01 par value (the "EAI
Preferred Stock"). As of July 30, 1998, there were 10,409,395 shares of EAI
Common Stock outstanding and no shares of EAI Preferred Stock outstanding. As of
July 30, 1998, there were 642 holders of record of EAI Common Stock. The EAI
Common Stock is listed and traded on the NNM under the symbol "EAII."
Common Stock
The holders of EAI Common Stock are entitled to one vote for each share
held of record on all matters voted upon by stockholders and may not use
cumulative voting for the election of directors. Thus, the owners of a majority
of the EAI Common Stock outstanding are able to elect all of the directors. Each
outstanding share of EAI Common Stock is entitled to participate equally in any
distribution of net assets made to the stockholders in liquidation, dissolution
or winding up of EAI and is entitled to participate equally in dividends and
other distributions, if, as and when declared by the Board of Directors. There
are no redemption, sinking fund, conversion or preemptive rights with respect to
the EAI Common Stock. All shares of EAI Common Stock have equal rights and
preferences.
EAI Preferred Stock
Pursuant to EAI's Certificate of Incorporation, as amended (the "EAI
Certificate"), EAI is authorized to issue up to 20,000,000 shares of EAI
Preferred Stock, which may be issued from time to time in one or more series
upon authorization by EAI's Board of Directors. EAI's Board of Directors,
without further approval of the stockholders, is authorized to fix the number of
shares constituting any series, dividend rights and terms, conversion rights and
terms, voting rights and terms, redemption rights and terms, liquidation
preferences and any other rights, preferences, privileges and restrictions
applicable to each series of the EAI Preferred Stock. The issuance of the EAI
Preferred Stock, while providing flexibility in connection with possible
acquisitions and other corporate purposes could, among other things, adversely
affect the voting power of the holders of the EAI Common Stock and, under
certain circumstances, have the effect of making it more difficult for a third
party to acquire, or discouraging a third party from acquiring, a majority of
the outstanding voting stock of EAI, or otherwise adversely affect the market
price of the EAI Common Stock. EAI is not aware of any plans by a third party to
seek control of EAI. EAI has no current plans to issue any EAI Preferred Stock.
Rights
EAI has adopted a Stockholders Rights Plan. Under the Stockholders Rights
Plan, each share of EAI Common Stock has associated with it one preferred share
purchase right (a "Right"). The terms of the Rights are set forth in a Rights
Agreement. Under certain circumstances described below, each Right would entitle
the holders thereof to purchase one one-hundred-fiftieth of a share of Series A
Junior Participating Preferred Stock of EAI for a price of $50.00 per one
one-hundred-fiftieth of a share. The Rights are not currently exercisable when
issued and are transferable only with the related shares of EAI Common Stock.
The Rights would become exercisable at the specified exercise price upon
the earlier to occur of (i) 10 business days after the first public announcement
that any person or group (other than an Exempt Person) (an "Acquiring Person")
has acquired beneficial ownership of 15% or more of the outstanding shares of
EAI Common Stock or (ii) 10 business days (unless delayed by EAI's Board of
Directors) after any person or group (other than an Exempt Person) has
commenced, or announced the intention to commence, a tender or exchange offer
that would, upon its consummation, result in such person or group being the
beneficial owner of 15% or more of the outstanding shares of EAI Common Stock
(each a "Triggering Event"). Rights will not be exercisable following the
occurrence of an event described below under the caption "Flip-in" prior to the
expiration of EAI's right to redeem the Rights. Rights certificates will be
distributed when the Rights become exercisable. An "Exempt Person" will include
EAI and certain related entities.
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<PAGE> 50
Flip-in. After the Rights become exercisable (unless the Triggering Event
is the commencement or the announcement of a tender or exchange offer as
described in (ii) in the immediately preceding paragraph), the holders of the
Rights (other than an Acquiring Person and certain transferees thereof) would be
entitled to exercise the Rights to purchase that number of shares of EAI Common
Stock which at the time of such acquisition would have a market value of two
times the exercise price of the Rights. After the occurrence of a Flip-in event,
the Rights of an Acquiring Person and such transferees will become void.
Flip-over. In the event that, on or after the date on which an Acquiring
Person has become such: (i) EAI merges into or consolidates with an Interested
Stockholder or, unless all holders of the outstanding shares of EAI Common Stock
are treated the same, any other person (with limited designated exceptions),
(ii) an Interested Stockholder or, unless all holders of the outstanding shares
of EAI Common Stock are treated the same, any other person (with limited
designated exceptions) merges into EAI or (iii) EAI sells or transfers 50% or
more of its consolidated assets or earning power to an Interested Stockholder
or, unless all holders of the outstanding shares of EAI Common Stock are treated
the same, any other person (with limited designated exceptions), the holders of
the Rights (other than Rights which have become void) would be entitled to
purchase common shares of the acquirer (or a person affiliated therewith) at a
50% discount. In general, an "Interested Stockholder" will be an Acquiring
Person and certain persons affiliated, associated or acting on behalf of or in
concert therewith.
Redemption of Rights. The Rights are redeemable, as a whole, at a
redemption price of $0.01 per Right, subject to adjustment, at the direction of
EAI's Board of Directors, at any time prior to the acquisition by a person or
group of beneficial ownership of 15% or more of the outstanding shares of EAI
Common Stock.
Exchange of Shares for Rights. At any time after any person or group shall
have become an Acquiring Person and before any person (other than an Exempt
Person), together with its affiliates and associates, shall have become the
beneficial owner of 50% or more of the outstanding shares of EAI Common Stock,
EAI's Board of Directors has the right to direct the exchange of shares of EAI
Common Stock for all or any part of the Rights (other than Rights that have
become void) at the exchange rate of one share of EAI Common Stock per Right,
subject to adjustment.
EAI's Rights Agreement may discriminate against a prospective holder of EAI
Common Stock as a result of such holder owning a substantial amount of shares
and may have the effect of delaying, deferring or preventing a change in control
of EAI. See "-- Comparison of Rights of EAI Stockholders and VSA Shareholders --
Stockholders Rights Plan."
DESCRIPTION OF VSA CAPITAL STOCK
The authorized capital stock of VSA consists of 100,000 shares of VSA
Common Stock, of which 69,970 shares are issued and outstanding as of the Record
Date and 73,468 will be issued and outstanding as of the Effective Time.
COMPARISON OF RIGHTS OF EAI STOCKHOLDERS AND VSA SHAREHOLDERS
EAI is incorporated under the laws of the State of Delaware and VSA is
incorporated under the laws of the State of Michigan. The rights of the holders
of VSA Common Stock are currently governed by the Michigan Business Corporation
Act (the "MBCA"), the VSA Articles of Incorporation, as amended (the "VSA
Articles"), and VSA's By-laws, as amended (the "VSA By-laws," together with the
VSA Articles, the "VSA Governing Documents"). If the Merger is consummated in
accordance with the terms of the Merger Agreement, VSA shareholders will become
holders of EAI Common Stock and their rights as such will be governed by the
General Corporation Law of the State of Delaware (the "DGCL"), the EAI
Certificate and EAI's By-laws (the "EAI By-laws," together with the EAI
Certificate, the "EAI Governing Documents"). In certain respects the rights of
holders of EAI Common Stock differ from those of holders of VSA Common Stock.
Certain of the material differences between the rights of holders of VSA Common
Stock and the rights of holders of EAI Common Stock are summarized below.
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<PAGE> 51
The following summary is not a complete statement of the rights of holders
of EAI Common Stock under applicable Delaware laws or the EAI Governing
Documents, or a comprehensive comparison with the rights of the holders of VSA
Common Stock under applicable Michigan laws or the VSA Governing Documents, or a
complete description of the specific provisions referred to herein. The
identification of specific differences is not meant to indicate that other
equally or more significant differences do not exist. This summary is qualified
in its entirety by reference to the DGCL, the MBCA, the EAI Governing Documents
and the VSA Governing Documents, to which holders of VSA Common Stock are
referred. For information as to how such documents may be obtained, see
"Available Information."
Advance Notice Requirements for Stockholder Proposals and Nomination of
Directors. The EAI By-laws provide that stockholders seeking to bring business
before or nominate directors at any annual meeting of stockholders must provide
timely notice thereof in writing. To be timely, a stockholder's notice must be
given in writing to the Secretary of EAI not less than 120 days or more than 150
days prior to the meeting. The EAI By-laws also specify certain requirements for
a stockholder's notice to be in proper written form. The MBCA, as well as the
DGCL, is silent as to advance notice of shareholder proposals and director
nominations and, unlike the EAI By-laws, the VSA Governing Documents do not
contain a provision requiring such advance notice.
Directors; Vacancies; Removal. The EAI By-laws provide that EAI shall have
at least three directors, with the exact number fixed by the Board of Directors.
The VSA By-laws provide that VSA shall have at least one and not more than five
directors, with the exact number determined by resolution of the Board of
Directors. The DGCL allows a board of directors to be divided into classes.
EAI's Board of Directors is divided into three classes of directors serving
staggered three-year terms. As a result, approximately one-third of EAI's Board
of Directors is elected each year. Like the DGCL, the MBCA also permits a board
of directors to be divided into classes. The VSA Governing Documents do not,
however, divide the VSA Board of Directors into classes. The DGCL and EAI
Governing Documents provide that vacancies on the board of directors may be
filled only by the affirmative vote of a majority of the remaining directors
then in office. Although the MBCA provides that shareholders or the board of
directors may fill vacancies on the board of directors, the VSA Governing
Documents provide that vacancies are filled by appointment made by the
affirmative vote of the majority of the remaining directors. The EAI Certificate
provides that directors may be removed only for cause and only by the holders of
at least 80% of the outstanding shares of stock entitled to vote generally in
the election of directors, voting together as a single class. Unless the
articles of incorporation provide otherwise, the MBCA authorizes the removal of
a director or the entire board of directors, with or without cause, by the
affirmative vote of the holders of a majority of the shares of the corporation
entitled to vote at an election of the directors. As the VSA Articles are silent
with respect to removal of directors, VSA directors may be removed, with or
without cause, according to the provisions of the MBCA.
Vote on Certain Fundamental Transactions. The DGCL and the EAI Governing
Documents require that any merger, consolidation, sale of all or substantially
all of the assets, or dissolution of a corporation be approved by the
affirmative vote of the holders of a majority of all outstanding shares of the
corporation entitled to vote thereon, except in certain instances applying to
the surviving corporation in a merger. Although the VSA Governing Documents are
silent as to this issue, the MBCA mandates that a plan, merger, share exchange,
sale of all or substantially all of the assets or dissolution of a corporation
must be approved by the affirmative vote of the holders of a majority of all
outstanding shares of capital stock of the corporation entitled to vote thereon,
except in certain instances applying to the surviving corporation in a merger.
Also see "-- Certain Business Combinations."
Special Meetings of Stockholders; Quorum; Stockholder Action By Written
Consent. Under the DGCL, unless otherwise authorized by a corporation's
certificate of incorporation or by-laws, special stockholder meetings may only
be called pursuant to a resolution adopted by a majority of the Board of
Directors. The DGCL provides that a majority of the shares entitled to vote,
represented in person or by proxy, constitute a quorum at a meeting of
stockholders. In addition, the DGCL generally allows (unless otherwise provided
in the certificate of incorporation) for stockholder actions to be taken,
without a meeting, without prior notice and without a vote, if a written consent
is signed by stockholders having not less than the minimum number of votes
necessary to authorize or take such action, provided that a subsequent notice of
the taking of corporate
44
<PAGE> 52
action by less than unanimous written consent is sent to stockholders who have
not consented in writing. The EAI Governing Documents provide that special
meetings of stockholders of EAI may be called only by a majority of EAI's board
of directors, EAI's chairman or its president. The EAI Governing Documents
provide that the stockholders of EAI may only take actions at a duly called
annual or special meeting of stockholders and may not take action by written
consent.
Under the MBCA, special shareholder meetings may be called by the board of
directors, or by officers, directors or shareholders as provided in the by-laws
of a corporation. Unless the articles of incorporation, by-laws or other
provisions of the MBCA provide otherwise, the MBCA provides that shares entitled
to cast a majority of the votes, represented in person or by proxy, at a
shareholder meeting constitute a quorum. The MBCA permits the articles of
incorporation of a corporation to provide that shareholder actions may be taken,
without a meeting, without prior notice and without a vote, if a written consent
is signed by shareholders having not less than the minimum number of votes
necessary to authorize or take such action, provided that a subsequent notice of
the taking of such corporate action by less than unanimous written consent is
given to shareholders who have not consented in writing and would have been
entitled to notice of the shareholder meeting if the action had been taken at a
meeting. The VSA Governing Documents provide that special meetings of the
shareholders may be called by the president or secretary at the direction of the
board of directors. The VSA By-laws provide that the holders of a majority of
the stock issued and outstanding and entitled to vote, represented in person or
by proxy, constitute a quorum at a meeting of the shareholders. The VSA
Governing Documents authorize shareholder action, without a meeting, without
prior notice and without a vote, in accordance with the provisions of the MBCA.
Issuance of Shares. The DGCL and the MBCA provide that the directors of a
corporation have the authority to declare issuances of stock.
Amendment of Certificate of Incorporation or Articles of Incorporation and
By-laws. The DGCL and the EAI Governing Documents allow EAI to amend its
certificate of incorporation if the EAI board of directors adopts a resolution
approving such an amendment and the stockholders thereafter approve the proposed
amendment, either at a special meeting or at the next annual stockholders
meeting. In general, the proposed amendment must be approved at the meeting by a
majority of the outstanding stock entitled to vote thereon. The EAI By-laws may
be amended by a majority affirmative vote of the shares entitled to vote or a
majority affirmative vote of EAI's board of directors. The MBCA allows VSA to
amend the VSA Articles upon a majority affirmative vote of the outstanding
shares entitled to vote. The MBCA and the VSA Governing Documents generally
permit VSA's shareholders or board of directors to amend VSA's By-laws at any
annual or special meeting of the shareholders upon a majority affirmative vote
of the shares entitled to vote or at any regular or special meeting of the Board
of Directors, upon a majority affirmative vote of VSA's board of directors.
Liability and Indemnification of Directors and Officers. The EAI Governing
Documents and the VSA Governing Documents provide that EAI and VSA shall,
subject to certain limitations, indemnify their directors and officers against
expenses (including attorneys' fees, judgments, fines and certain settlements)
actually and reasonably incurred by them in connection with any suit or
proceeding to which they are a party so long as they acted in good faith and in
a manner reasonably believed to be in or not opposed to the best interests of
the corporation, and, with respect to a criminal action or proceeding, so long
as they had no reasonable cause to believe their conduct to have been unlawful.
Section 102 of the DGCL and Section 209 of the MBCA permit a corporation to
include in its certificate of incorporation and articles of incorporation,
respectively, a provision eliminating or limiting a director's liability to a
corporation or its stockholders for monetary damages for breaches of fiduciary
duty. These sections also provide, however, that liability for breaches of the
duty of loyalty, acts or omissions not in good faith or involving intentional
misconduct, or knowing violation of the law, and the unlawful purchase or
redemption of stock or payment of unlawful dividends or the receipt of improper
personal benefits cannot be eliminated or limited in this manner. The EAI
Certificate and the VSA Articles both include provisions that eliminate, to the
fullest extent permitted by law, director liability for monetary damages for
breaches of fiduciary duty.
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<PAGE> 53
Payment of Dividends. The DGCL allows a corporation, subject to any
restrictions contained in its certificate of incorporation, to pay dividends out
of its surplus or, in case there is no surplus, out of net profits for the
fiscal year in which declared or out of net profits for the preceding fiscal
year. The EAI Certificate permits the payment of dividends in accordance with
the DGCL, but, to date, EAI has not paid any cash dividends on the EAI Common
Stock. Although the VSA Governing Documents are silent on the issue, the MBCA
allows a corporation, subject to any restrictions contained in its articles of
incorporation, to pay dividends, unless the corporation is unable to pay its
debts as they become due or the corporation's total assets would be less than
its total liabilities plus the amount which would be needed to satisfy any
preferential rights of shareholders upon dissolution.
Appraisal or Dissenters' Rights. Section 262 of the DGCL and Section 762 of
the MBCA provide that stockholders of corporations being acquired pursuant to a
merger have the right to exercise certain "appraisal rights" or "dissenters'
rights" to dissent from such corporate action and to demand payment of the fair
value of their shares. Section 262 of the DGCL states that such dissenters'
rights may be exercised when the stockholders receive any form of consideration
for their shares other than (i) shares of stock of the surviving corporation,
(ii) shares of stock that are listed on a national securities exchange, or
designated as a national market system security on an interdealer quotation
system such as the NNM, or held of record by more than 2,000 stockholders, (iii)
cash in lieu of fractional shares, or (iv) any combination thereof. Section 762
of the MBCA provides that a shareholder may exercise dissenters' rights when the
shareholders receive any form of consideration for their shares in a merger
other than (i) shares of stock that are listed on a national securities
exchange, or designated as a national market system security on an interdealer
quotation system such as the NNM or (ii) cash. Additionally, the holders of
shares of stock that are listed on a national securities exchange or designated
as a national market system security on an interdealer quotation system such as
the NNM are not entitled to dissenters' rights in a merger. Under the DGCL and
the MBCA, corporations are allowed to enlarge these statutory rights pursuant to
their certificate of incorporation or articles of incorporation, respectively,
but neither the EAI Certificate nor the VSA Articles has expanded upon such
rights.
Stockholder Rights Plan. EAI has adopted a Stockholder Rights Plan,
pursuant to which holders of EAI Common Stock receive one Right, a preferred
share purchase right, for each outstanding share of EAI Common Stock, with each
Right entitling its holder to purchase one one-hundred-fiftieth of a share of
Series A Junior Participating Preferred Stock of EAI for a price of $50.00 per
one one-hundred-fiftieth of a share, subject to certain adjustments. The Rights
become exercisable if any person or entity acquires 15% or more of the
outstanding EAI Common Stock, or commences a tender or exchange offer that would
cause the offeror to own 15% or more of the outstanding EAI Common Stock. Under
certain circumstances involving an attempted takeover of EAI, holders of Rights
would be entitled to purchase shares of EAI Common Stock or common stock of the
acquiring person or entity having a value equal to two times the exercise price
of the Right. The Rights are redeemable by EAI at a price of $0.01 per Right.
See "Description of EAI Stock." VSA has not adopted any similar shareholder
rights plan.
Certain Business Combinations. Section 203 of the DGCL contains a "business
combination" section applicable to certain Delaware corporations such as EAI
that have a class of voting stock that is (i) listed on a national securities
exchange, (ii) authorized for quotation on the NNM, or (iii) held of record by
more than 2,000 stockholders. Section 203 prohibits certain transactions between
a Delaware corporation and an "interested stockholder," which is defined as a
person who, together with any affiliates or associates of such person,
beneficially owns, directly or indirectly, 15% or more of the outstanding voting
shares of a Delaware corporation. This provision prohibits certain business
combinations (defined broadly to include mergers, consolidations, sales or other
dispositions of such assets having an aggregate value in excess of 10% of the
consolidated assets of the corporation, and certain transactions that would
increase the interested stockholder's proportionate share ownership in the
corporation) between an interested stockholder and a corporation for a period of
three years after the date the interested stockholder becomes an interested
stockholder, unless (i) the business combination is approved by the
corporation's board of directors prior to the date the interested stockholder
becomes an interested stockholder, (ii) the interested stockholder acquired at
least 85% of the voting stock of the corporation (other than stock held by
directors who are also officers or by certain employee stock plans) in the
transaction in which it becomes an interested stockholder, or (iii) the business
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<PAGE> 54
combination is approved by a majority of the board of directors and by the
affirmative vote of 66 2/3% of the outstanding voting stock that is not owned by
the interested stockholder. The DGCL allows Delaware corporations to elect not
to be governed by these provisions. EAI, however, has not so elected, and is
subject to the business combination section of the DGCL.
Section 780 of the MBCA provides that a supermajority vote of 90% of the
shareholders and no less than two-thirds of the votes of noninterested
shareholders must approve a "business combination." A "business combination", as
defined, encompasses any merger, consolidation, share exchange, sale of assets,
stock issue, liquidation, or reclassification of securities involving an
"interested shareholder" or certain "affiliates." An "interested shareholder" is
generally any person who owns 10% or more of the outstanding voting shares of
the corporation. An "affiliate" is a person who directly or indirectly controls,
is controlled by, or is under common control with a specified person. The
supermajority vote required by the MBCA does not apply to business combinations
that satisfy certain conditions. These conditions include, among others: (i) the
purchase price to be paid for the shares of the corporation in the business
combination must be at least equal to the highest of either (a) the market value
of the shares or (b) the highest per share price paid by an interested
shareholder within the preceding two-year period or in the transaction in which
the shareholder became an interested shareholder, whichever is higher; and (ii)
once becoming an interested shareholder, the person may not become the
beneficial owner of any additional shares of the corporation except as part of
the transaction that resulted in the interested shareholder becoming an
interested shareholder or by virtue of proportionate stock splits or stock
dividends. The requirements of the MBCA do not apply to business combinations
with an interested shareholder that the Board of Directors has approved or
exempted from the requirements of the MBCA by resolution prior to the time that
the interested shareholder first became an interested shareholder.
Interested Director Transactions. The DGCL provides that contracts or
transactions in which one or more of the corporation's directors or officers
have an interest ("Interested Contracts or Transactions") are not void or
voidable solely because of such interest or because such director was present at
the directors' or stockholders' meeting where such contracts or transactions
were approved, provided certain conditions are met. Interested Contracts or
Transactions may be approved by a majority vote of the disinterested directors
or by vote of disinterested stockholders if the material facts of the contracts
or transactions and the director's interest in such contracts or transactions
are fully disclosed and a vote is taken in good faith. Furthermore, Interested
Contracts or Transactions may be approved if such contracts or transactions are
shown to be fair and reasonable to the corporation at the time they are
authorized, approved or ratified by the board of directors or stockholders and
separate disinterested stockholder or disinterested director approval is not
required. The MBCA has a comparable provision.
EAI's Quotation on the NNM. EAI Common Stock is quoted on the NNM. In
contrast, VSA Common Stock is not listed on a national securities exchange or
quotation system. As a result, EAI's stockholders enjoy a broader and more
active market for EAI Common Stock than has historically existed for VSA Common
Stock.
Preferred Stock. Pursuant to the EAI Certificate, EAI is authorized to
issue up to 20,000,000 shares of EAI Preferred Stock, which may be issued from
time to time in one or more series upon authorization by EAI's Board of
Directors. Without further approval of the stockholders, the board of directors
is authorized to fix the designation of each series, the stated value of each
series, the dividend rate and other provisions respecting the payment of
dividends, the preferences of the shares in each series, convertibility terms
and any other relative, participating, optional or other special rights, and
qualifications, limitations or restrictions of the shares of each series. VSA
has not authorized any preferred stock.
LEGAL MATTERS
The validity of the shares of EAI Common Stock to be issued in connection
with the Merger will be passed upon for EAI by Gardner, Carton & Douglas,
Chicago, Illinois.
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TAX OPINION
Certain of the tax consequences of the Merger will be passed upon by Ernst
& Young LLP. See "The Merger -- Certain Federal Income Tax Consequences."
EXPERTS
EAI
The consolidated financial statements of EAI at December 31, 1997 and 1996,
and for each of the three years in the period ended December 31, 1997, included
in the Annual Report on Form 10-K, for the year ended December 31, 1997, which
is incorporated by reference and made a part of this Information Statement/
Prospectus and Registration Statement, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon included therein and
incorporated herein by reference. Such consolidated financial statements are
incorporated by reference in reliance upon such report given upon the authority
of such firm as experts in accounting and auditing.
VSA
The financial statements of VSA at June 30, 1998 and 1997 and for each of
the years then ended have been included in the Information Statement/Prospectus,
which is referred to and made a part of this Registration Statement, have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
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INDEX TO VSA FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. F-2
Balance Sheets at June 30, 1998 and 1997.................... F-3
Statements of Operations -- Years ended June 30, 1998 and
1997...................................................... F-4
Statement of Stockholders' Equity -- Years ended June 30,
1998 and 1997............................................. F-5
Statements of Cash Flows -- Years ended June 30, 1998 and
1997...................................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 57
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Variation Systems Analysis, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Variation
Systems Analysis, Inc. and Subsidiaries as of June 30, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Variation
Systems Analysis, Inc. and subsidiaries at June 30, 1998 and 1997, and the
consolidated results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
August 6, 1998
F-2
<PAGE> 58
VARIATION SYSTEMS ANALYSIS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
------------------------
1998 1997
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 146,567 $ 238,159
Accounts receivable, trade................................ 4,169,679 2,986,952
Note receivable, related party............................ 116,244 116,244
Cost and estimated earnings in excess of billings on jobs
in
process................................................ 691,414 269,660
Prepaid expenses and other current assets................. 43,586 112,352
Refundable federal income tax............................. -- 60,515
---------- ----------
Total current assets.............................. 5,167,490 3,783,882
Property and equipment:
Equipment................................................. 1,575,440 1,379,270
Furniture and fixtures.................................... 151,733 128,304
Transportation equipment.................................. 53,851 53,851
Leasehold improvements.................................... 23,044 25,571
---------- ----------
1,804,068 1,586,996
Less accumulated depreciation............................. 1,163,228 956,600
---------- ----------
Net property and equipment.................................. 640,840 630,396
Other assets:
Deferred tax asset........................................ 110,500 79,500
Other..................................................... 74,308 32,947
---------- ----------
Total other assets................................ 184,808 112,447
---------- ----------
Total assets...................................... $5,993,138 $4,526,725
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 130,760 $ 218,202
Customer deposits......................................... 78,953 139,159
Line of credit............................................ 1,916,824 530,118
Accrued compensation...................................... 1,466,829 1,135,550
Income taxes payable...................................... 351,791 184,165
Accrued other............................................. 211,740 126,475
---------- ----------
Total current liabilities......................... 4,156,897 2,333,669
Other liabilities:
Notes payable, officer.................................... 543,272 1,101,626
Deferred revenue.......................................... 416,640 272,131
---------- ----------
Total other liabilities........................... 959,912 1,373,757
Stockholders' equity:
Common stock, $1.00 par value:
Authorized -- 100,000 shares issued and outstanding --
68,832 shares in 1998 and 69,832 in 1997.............. 68,832 69,832
Additional paid-in capital................................ 1,073,770 1,114,140
Foreign currency translation adjustments.................. (46,735) (17,071)
Accumulated deficit....................................... (219,538) (347,602)
---------- ----------
Total stockholders' equity........................ 876,329 819,299
---------- ----------
Total liabilities and stockholders' equity........ $5,993,138 $4,526,725
========== ==========
</TABLE>
See accompanying notes.
F-3
<PAGE> 59
VARIATION SYSTEMS ANALYSIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------
1998 1997
---- ----
<S> <C> <C>
Net sales................................................... $18,141,799 $16,936,358
Cost of sales............................................... 11,527,833 11,855,551
----------- -----------
Gross profit................................................ 6,613,966 5,081,207
Operating expenses:
Sales and marketing....................................... 890,695 736,824
General and administrative................................ 1,646,074 1,423,102
Research and development.................................. 3,441,556 2,637,911
----------- -----------
5,978,325 4,797,837
----------- -----------
Income from operations...................................... 635,641 283,370
Other expenses.............................................. (142,986) (103,278)
----------- -----------
Income before income taxes.................................. 492,655 180,092
Income taxes................................................ 216,776 127,916
----------- -----------
Net income.................................................. $ 275,879 $ 52,176
=========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 60
VARIATION SYSTEMS ANALYSIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN TRANSLATION ACCUMULATED
STOCK CAPITAL ADJUSTMENT DEFICIT TOTAL
------ ---------- ----------- ----------- -----
<S> <C> <C> <C> <C> <C>
Balance at July 1, 1996................ $70,932 $1,240,643 $(14,120) $(327,147) $ 970,308
Net income for 1997.................... -- -- 52,176 52,176
Foreign currency translation loss...... -- -- (2,951) -- (2,951)
Shares redeemed........................ (1,100) (126,503) -- (72,631) (200,234)
------- ---------- -------- --------- ---------
Balance at June 30, 1997............... 69,832 1,114,140 (17,071) (347,602) 819,299
Net income............................. -- -- -- 275,879 275,879
Foreign currency translation loss...... -- -- (29,664) -- (29,664)
Shares issued in lieu of cash
compensation......................... 674 126,732 -- -- 127,406
Shares redeemed........................ (1,674) (167,102) -- (147,815) (316,591)
------- ---------- -------- --------- ---------
Balance at June 30, 1998............... $68,832 $1,073,770 $(46,735) $(219,538) $ 876,329
======= ========== ======== ========= =========
</TABLE>
See accompanying notes.
F-5
<PAGE> 61
VARIATION SYSTEMS ANALYSIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................. $ 275,879 $ 52,176
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.......................... 229,076 175,481
Gain on sale of fixed assets........................... 7,690 --
Change in assets and liabilities:
(Increase) decrease in accounts receivable........... (1,187,669) 439,127
(Increase) decrease in costs in excess of billings... (423,060) 94,286
(Increase) decrease in prepaid expenses and other
current assets...................................... 68,766 (24,307)
(Increase) in other assets........................... (45,633) (14,872)
Increase (decrease) in accounts payable.............. (87,442) 35,959
Increase (decrease) in customer deposits............. (60,206) --
Increase (decrease) in accrued expenses.............. 543,613 (224,332)
Increase (decrease) in income taxes payable.......... 228,141 (122,472)
Increase in deferred taxes........................... (31,000) (26,000)
(Increase) in deferred revenue....................... 144,509 117,084
----------- ---------
Net cash provided (used) by operating activities............ (337,336) 502,130
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment.......................... (242,938) (321,846)
----------- ---------
Net cash used in investing activities....................... (242,938) (321,846)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from line of credit................................ 1,386,706 530,118
Payments on officer note.................................... (558,354) (646,870)
Stock redemptions........................................... (316,591) (200,233)
Payments on loan to related party........................... -- 30,000
----------- ---------
Net cash provided (used) by financing activities............ 511,761 (286,985)
----------- ---------
Net decrease in cash and cash equivalents................... (68,513) (106,701)
Effect of exchange rates on cash............................ (23,079) (29,554)
Cash and cash equivalents at beginning of period............ 238,159 374,404
----------- ---------
Cash and cash equivalents at end of period.................. $ 146,567 $ 238,159
=========== =========
</TABLE>
See accompanying notes.
F-6
<PAGE> 62
VARIATION SYSTEMS ANALYSIS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Variation Systems Analysis, Inc. and subsidiaries (the "Company") provides
and sells dimensional management software technology and consulting services to
improve quality, reduce costs and reduce concept to market time of complex
assemblies.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Variation
Systems Analysis, Inc. and its foreign subsidiaries, Variation Systems Analysis,
Ltd. and Variation Systems Analysis GMBH. All significant intercompany
transactions and accounts have been eliminated in consolidation.
Variation Systems Analysis, Inc. owns 95% of Variation Systems Analysis
GMBH. The minority interest in this subsidiary is accounted for as a liability
in these financial statements. However inasmuch as the losses exceed the
minority interest capital (all contributed by VSA), these statements reflect
100% of the activity for the period of operations of this subsidiary included in
these financial statements.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. The carrying amount
of cash equivalents approximates fair value.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to credit risk
consist principally of temporary cash investments and trade accounts
receivables.
Concentrations of credit risk with respect to trade receivables exist due
to the small number of customers comprising the Company's customer base and
their concentration in similar industries and geographic areas. As of June 30,
1998 and 1997, the Company had the following concentrations at risk:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Largest exposure to one customer............................ 28.0% 45.1%
Exposure to five largest customers.......................... 69.6% 66.9%
</TABLE>
REVENUE RECOGNITION
Revenue from sales of software products is recognized upon delivery of the
software product to the customer and satisfaction of significant related
obligations, if any. Revenue from consulting and product maintenance contracts
is deferred and recognized ratably over the period the services are provided.
Revenue is recognized based upon labor and other costs incurred and
progress to completion on contracts. Costs and estimated earnings in excess of
billings on jobs in process represent revenue earned but not yet billable based
on terms of the contract. Billings are made based on milestones or as otherwise
provided for in the contracts.
F-7
<PAGE> 63
VARIATION SYSTEMS ANALYSIS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed on the
straight line method and accelerated methods over the estimated useful lives as
indicated below:
<TABLE>
<S> <C>
Equipment................................................... 5-10 years
Furniture and fixtures...................................... 7-10 years
Transportation equipment.................................... 3-5 years
Leasehold improvements...................................... 5-10 years
</TABLE>
FOREIGN CURRENCY TRANSLATION
The functional currencies of the Company's foreign subsidiaries are
considered to be the respective subsidiary's local currency. The effect of the
cumulative translation has been disclosed as a separate component of
shareholder's equity in the Company's financial statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments generally consist of cash and cash
equivalents, accounts receivable, accounts payable and long-term debt. The
carrying amounts of financial instruments approximated their fair value at June
30, 1998 and 1997.
INCOME TAXES
The Company accounts for income taxes using the liability method. Under
this method, deferred income taxes are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred taxes are recorded based on enacted tax laws and tax rates.
Changes in enacted tax rates will be reflected in the tax provision as they
occur.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued No. 130, "Reporting Comprehensive Income."
Statement No. 130 is effective for fiscal years beginning after December 15,
1997. Statement No. 130 establishes standards for the reporting of comprehensive
income in a full set of general purpose financial statements. Management
believes the adoption of Statement No. 130 will not have a material effect on
the Company's financial statements.
Also in June 1997, the FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information." Statement No. 131 is
effective for years beginning after December 15, 1997. Statement No. 131
establishes standards for disclosures about operating segments, products and
services, geographic areas and major customers. Management believes the adoption
of Statement No. 131 will not have a material effect on the Company's financial
statements.
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-2 ("SOP 97-2"), "Software Revenue Recognition."
This Statement establishes revenue recognition requirements for companies that
sell software for fiscal years beginning after December 15, 1997. Management is
currently evaluating the impact of SOP 97-2 and has not determined the result,
if any, on the Company's financial position, results of operations or cash
flows.
2. LINE OF CREDIT
The Company has a promissory note (revolving basis) with a local financial
institution with a maximum limit of $2,500,000, bearing interest at prime less
1/4%. Advances against this credit facility amounted to
F-8
<PAGE> 64
VARIATION SYSTEMS ANALYSIS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. LINE OF CREDIT -- (CONTINUED)
$1,916,824 and $530,118 at June 30, 1998 and 1997, respectively. Amounts
outstanding in excess of $2,000,000 are personally guaranteed by the majority
shareholder. The promissory note is due on demand and is secured by all of the
Company's assets.
3. NOTE RECEIVABLE, RELATED PARTY
The Company has a note receivable dated September 1994 from a related
company with 7 1/2% annual interest, payable on a monthly basis. Balance of the
note receivable was $116,244 as of June 30, 1998 and 1997. The note is payable
on demand.
4. PROVISION FOR TAXES
The components of income tax expense for the years ended June 30 are as
follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Current tax expense:
Federal................................................ $161,816 $ 63,412
State.................................................. 20,537 15,504
Foreign................................................ 65,423 75,000
-------- --------
247,776 153,916
Deferred................................................. (31,000) (26,000)
-------- --------
$216,776 $127,916
======== ========
</TABLE>
A reconciliation of income tax computed at the U.S. statutory rate to the
effective income tax rate is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Tax at U.S. statutory rate............................... $167,503 $ 61,231
State income taxes, net of federal benefit............... 13,554 10,233
Benefit of foreign losses not recognized................. 14,838 50,227
Other.................................................... 20,881 6,225
-------- --------
$216,776 $127,916
======== ========
</TABLE>
Total deferred tax assets at June 30, 1998 and 1997 are $110,500 and
$79,500, respectively. The principal source of the deferred tax assets are
differences between book and tax depreciation methods.
The Company made income tax payments of $159,722 and $297,594,
respectively, for the years ended June 30, 1998 and 1997.
5. LEASE AGREEMENT
The Company leases office space at their corporate headquarters in St.
Clair Shores, Michigan. The Company entered into an operating lease in 1996 for
three years that requires the Company to pay monthly rent of $13,988 plus taxes,
insurance, maintenance and utilities. The Company also has operating leases for
additional office space and equipment, with various lease terms expiring through
2002.
F-9
<PAGE> 65
VARIATION SYSTEMS ANALYSIS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. LEASE AGREEMENT -- (CONTINUED)
Future minimum lease payments at June 30, 1998 are as follows:
<TABLE>
<S> <C>
1999........................................................ $357,277
2000........................................................ 191,151
2001........................................................ 91,900
2002........................................................ 58,025
--------
$698,353
========
</TABLE>
Total rent expense (exclusive of taxes, insurance, maintenance and
utilities) for the years ended June 30, 1998 and 1997 was $274,415 and $226,917,
respectively.
6. STOCK PURCHASE PLAN
Upon achieving predetermined goals and profits all eligible employees,
those with one or more years of service will receive incentive letters
redeemable at the Company's year end for the Company's stock. For the years
ended June 30, 1998 and 1997, shares will be distributed to employees comprising
a dollar equivalent stock bonus of $175,000 and $189,913, respectively on a
pre-tax basis. The shares to be issued will be equivalent to the net after tax
pay.
7. EMPLOYEE STOCK OWNERSHIP PLAN
On July 1, 1991, the Company adopted an employee stock ownership plan
(ESOP) covering all full-time employees who have met certain service
requirements. The plan provides for discretionary contributions by the Company
as determined annually by the Board of Directors, up to the maximum amount
permitted under the Internal Revenue Code.
The Company made no discretionary contributions to the ESOP for the years
ended June 30, 1998 and 1997, respectively.
8. NOTE PAYABLE, OFFICER
The Company has outstanding a demand note due to its officer with a balance
of $543,272 and $1,101,626 at June 30, 1998 and 1997, respectively. The note
carries an interest rate of 10%.
9. SUBSEQUENT EVENT
In July 1998, the Company entered into a merger agreement with Engineering
Animation, Inc. ("EAI"). The merger agreement calls for the Company's
shareholders to receive shares of EAI common stock valued at $26 million.
F-10
<PAGE> 66
VARIATION SYSTEMS ANALYSIS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
APPENDIX A
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
AMONG
ENGINEERING ANIMATION, INC.,
EAI VICTORY, INC.
AND
VARIATION SYSTEMS ANALYSIS, INC.
---------------------------
DATED AS OF AUGUST 5, 1998
---------------------------
<PAGE> 67
VARIATION SYSTEMS ANALYSIS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
TABLE OF CONTENTS
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
<TABLE>
<S> <C> <C>
ARTICLE I. THE MERGER............................................... A-1
1.1. The Merger.................................................. A-1
1.2. Closing..................................................... A-1
1.3. Effective Time.............................................. A-1
1.4. Effects of the Merger....................................... A-1
1.5. Articles of Incorporation and By-Laws....................... A-1
1.6. Directors and Officers...................................... A-2
1.7. Tax and Accounting Consequences............................. A-2
ARTICLE II. CONVERSION AND EXCHANGE OF SHARES....................... A-2
2.1. Definitions................................................. A-2
2.2. Total Merger Consideration.................................. A-2
2.3. Conversion of Sub Stock..................................... A-2
2.4. Conversion of VSA Stock..................................... A-2
2.5. Exchange of Shares.......................................... A-3
ARTICLE III. REPRESENTATIONS AND WARRANTIES OF VSA.................. A-4
3.1. Corporate Organization...................................... A-4
3.2. Capitalization.............................................. A-4
3.3. Authority; No Violation..................................... A-4
3.4. Consents and Approvals...................................... A-5
3.5. Reports..................................................... A-5
3.6. Compliance with Applicable Law.............................. A-5
3.7. Financial Statements........................................ A-5
3.8. Absence of Certain Changes or Events........................ A-5
3.9. Legal Proceedings and Restrictions.......................... A-6
3.10. Taxes and Tax Returns....................................... A-6
3.11. Employee Benefits........................................... A-8
3.12. ESOP........................................................ A-9
3.13. Employment and Labor Relations.............................. A-9
3.14. Contracts................................................... A-9
3.15. Undisclosed Liabilities..................................... A-10
3.16. Environmental Liability..................................... A-10
3.17. Tangible Assets............................................. A-11
3.18. Real Property............................................... A-11
3.19. Intellectual Property....................................... A-11
3.20. Notes and Accounts Receivable............................... A-12
3.21. Bank Accounts and Powers of Attorney........................ A-12
</TABLE>
i
<PAGE> 68
VARIATION SYSTEMS ANALYSIS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<S> <C> <C>
3.22. Guaranties.................................................. A-12
3.23. Insurance................................................... A-12
3.24. Service Contracts and Warranties............................ A-12
3.25. Certain Relationships....................................... A-12
3.26. S-4 Information............................................. A-13
3.27. Broker's Fees............................................... A-13
3.28. Certain Customer Relationships.............................. A-13
3.29. Disclosure.................................................. A-13
ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF EAI................... A-13
4.1. Corporate Organization...................................... A-13
4.2. Capitalization.............................................. A-13
4.3. Authority; No Violation..................................... A-13
4.4. Consents and Approvals...................................... A-14
4.5. SEC Reports................................................. A-14
4.6. S-4 Information............................................. A-14
4.7. Ownership of Sub; No Prior Activities....................... A-14
4.8. Broker's Fee................................................ A-15
4.9. Absence of Certain Changes or Events........................ A-15
4.10. Legal Proceedings and Restrictions.......................... A-15
4.11. Compliance With Applicable Law.............................. A-15
4.12. Intellectual Property....................................... A-15
4.13. Disclosure.................................................. A-15
ARTICLE V. COVENANTS RELATING TO CONDUCT OF BUSINESS................ A-15
5.1. Conduct of Business Prior to the Effective Time............. A-15
5.2. VSA Forbearances............................................ A-16
5.3. EAI Forbearances............................................ A-16
ARTICLE VI. ADDITIONAL AGREEMENTS................................... A-17
6.1. Regulatory and Other Matters................................ A-17
6.2. Access to Information....................................... A-17
6.3. Stockholders' Approval...................................... A-17
6.4. NNM Listing................................................. A-17
6.5. Affiliates.................................................. A-17
6.6. Additional Agreements....................................... A-17
6.7. Advice of Changes........................................... A-18
6.8. Takeover Proposals.......................................... A-18
6.9. Tax Matters................................................. A-18
6.10. ESOP Committee.............................................. A-19
6.11. Termination of ESOP......................................... A-19
6.12. Tax Matters................................................. A-19
6.13. Intellectual Property Assignment............................ A-19
</TABLE>
ii
<PAGE> 69
VARIATION SYSTEMS ANALYSIS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<S> <C> <C>
6.14. Employment Agreement........................................ A-19
6.15. Form 8-K.................................................... A-19
6.16. Indemnification............................................. A-19
ARTICLE VII. CONDITIONS PRECEDENT................................... A-20
Conditions to Each Party's Obligation To Effect the
7.1. Merger...................................................... A-20
7.2. Conditions to Obligations of EAI and Sub.................... A-20
7.3. Conditions to Obligations of VSA............................ A-21
ARTICLE VIII. TERMINATION AND AMENDMENT............................. A-21
8.1. Termination................................................. A-21
8.2. Effect of Termination....................................... A-22
8.3. Amendment; Extension; Waiver................................ A-22
ARTICLE IX. INDEMNIFICATION......................................... A-23
9.1. Indemnification by Stockholder.............................. A-23
9.2. Claims...................................................... A-23
9.3. Notice of Third-Party; Assumption of Defense................ A-23
9.4. Settlement or Compromise.................................... A-23
9.5. Failure of Indemnifying Person to Act....................... A-24
9.6. Limitations on Stockholders Indemnity....................... A-24
ARTICLE X. GENERAL PROVISIONS....................................... A-24
10.1. Expenses.................................................... A-24
10.2. Notices..................................................... A-24
10.3. Interpretation.............................................. A-25
10.4. Counterparts; Facsimile..................................... A-25
10.5. Entire Agreement............................................ A-25
10.6. Governing Law............................................... A-25
10.7. Survival.................................................... A-25
10.8. Severability................................................ A-26
10.9. Publicity................................................... A-26
10.10. Assignment; Third Party Beneficiaries....................... A-26
10.11. Knowledge and Awareness..................................... A-26
10.12. Construction................................................ A-26
10.13. Pooling of Interests Accounting; Tax Free Reorganization.... A-26
</TABLE>
iii
<PAGE> 70
VARIATION SYSTEMS ANALYSIS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER, dated as of August 5,
1998 (the "Agreement"), by and among ENGINEERING ANIMATION, INC., a Delaware
corporation ("EAI"), EAI VICTORY, INC., a Michigan corporation and a wholly
owned subsidiary of EAI ("Sub") and VARIATION SYSTEMS ANALYSIS, INC., a Michigan
corporation ("VSA").
WHEREAS, the Boards of Directors of EAI and VSA have determined that it is
in the best interests of their respective companies and stockholders to
consummate the business combination provided for in this Agreement in which Sub,
subject to the terms and conditions set forth herein, shall merge with and into
VSA (the "Merger") and as a result, VSA shall become a wholly owned subsidiary
of EAI.
WHEREAS, the parties desire to make certain representations, warranties and
agreements in connection with the Merger and to establish certain conditions to
the Merger.
WHEREAS, the Stockholder (as defined in Article IX) is the majority
stockholder of VSA.
WHEREAS, as of July 29, 1998, EAI, Sub and VSA entered into an Agreement
and Plan of Merger (the "Original Agreement"), and the parties desire to amend
and restate the Original Agreement in its entirety in the manner provided
herein.
NOW, THEREFORE, in consideration of the mutual covenants, representations,
warranties and agreements contained herein, the parties agree as follows:
ARTICLE I.
THE MERGER
1.1. The Merger. Subject to the terms and conditions of this Agreement, in
accordance with the Michigan Business Corporation Act (the "MBCA"), at the
Effective Time (as hereinafter defined), Sub shall merge with and into VSA. VSA
shall be the surviving corporation in the Merger (hereinafter sometimes referred
to as the "Surviving Corporation"), and shall continue its corporate existence
under the laws of the State of Michigan under the name of "Variation Systems
Analysis, Inc.". Upon consummation of the Merger, the separate corporate
existence of Sub shall terminate.
1.2. Closing. Subject to the terms and conditions of this Agreement, the
closing of the Merger (the "Closing") will take place at 10:00 a.m., at the
offices of Gardner, Carton & Douglas, 321 North Clark Street, Chicago, Illinois,
as soon as practical, but in any event not later than five business days after
the satisfaction or waiver of the latest to occur of the conditions set forth in
Article VII, unless extended by mutual agreement of the parties (the actual date
of the Closing is referred to herein as the "Closing Date"). The parties
anticipate that the Closing shall occur on or before September 30, 1998.
1.3. Effective Time. Subject to the terms and conditions of this
Agreement, the Merger shall become effective as set forth in the certificate of
merger in a form mutually agreeable to the parties hereto (the "Certificate of
Merger"), which shall be filed with the Secretary of State of the State of
Michigan (the "Michigan Secretary") in accordance with the provisions of the
MBCA on or, if the parties agree, before the Closing Date. The term "Effective
Time" shall be the date and time when the Merger becomes effective, as set forth
in the Certificate of Merger.
1.4. Effects of the Merger. At and after the Effective Time, the Merger
shall have the effects set forth in the MBCA.
1.5. Articles of Incorporation and By-Laws. Subject to the terms and
conditions of this Agreement, at the Effective Time, the Articles of
Incorporation and By-Laws of VSA shall be amended and restated in the forms
attached as Exhibit F and Exhibit G, respectively, and be the Amended and
Restated Articles of Incorporation and Amended and Restated By-Laws of the
Surviving Corporation, until thereafter amended in accordance with applicable
law.
<PAGE> 71
VARIATION SYSTEMS ANALYSIS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1.6. Directors and Officers. The directors and officers of Sub immediately
prior to the Effective Time shall continue as the directors and officers of the
Surviving Corporation, unless and until thereafter changed in accordance with
the provisions of the MBCA and the Surviving Corporation's Articles of
Incorporation and By-Laws.
1.7. Tax and Accounting Consequences. EAI and VSA intend that the Merger
shall constitute a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code"), and that this Agreement
shall constitute a "plan of reorganization" for the purposes of Section 368 of
the Code. EAI and VSA also intend that the Merger be accounted for as a pooling
of interests pursuant to Opinion No. 16 of the Accounting Principles Board.
ARTICLE II.
CONVERSION AND EXCHANGE OF SHARES
2.1. Definitions. The following terms shall have the following respective
meanings for purposes of this Agreement:
(a) "EAI Common Stock" shall mean each share of the Common Stock, $.01 par
value per share, of EAI.
(b) "EAI Stock Value" shall mean the average closing sale price of the EAI
Common Stock, as reported on the NASDAQ Stock Market National Market (the
"NNM"), for the five trading days commencing with July 23, 1998 and continuing
through July 29, 1998, as reported in the NNM listings published in The Wall
Street Journal.
(c) "Sub Stock" shall mean each share of the common stock, no par value per
share, of Sub.
(d) "VSA Certificate" shall mean each certificate representing any shares
of VSA Stock outstanding immediately prior to the Effective Time.
(e) "VSA Stock" shall mean each share of the common stock, $1.00 par value
per share, of VSA, including the common stock of VSA being held pursuant to
VSA's Employee Stock Ownership Plan.
2.2. Total Merger Consideration. The total consideration payable as
provided herein to holders of VSA Stock upon consummation of the Merger shall be
equal to that amount of EAI Common Stock having an aggregate EAI Stock Value
equal to Twenty Six Million and 00/00 U.S. Dollars (U.S. $26,000,000).
2.3. Conversion of Sub Stock. At the Effective Time, each share of Sub
Common Stock issued and outstanding immediately prior thereto shall be converted
into one share of common stock, $1.00 par value per share, of the Surviving
Corporation.
2.4. Conversion of VSA Stock. At the Effective Time, by virtue of the
Merger and without any action on the part of EAI, Sub, VSA or any stockholder of
VSA (the "VSA Stock Conversion"):
(a) Each share of the VSA Stock issued and outstanding immediately prior to
the Effective Time (including, but not limited to, the Bonus Shares (as defined
in Section 2.5(d) below)), other than Dissenter's Shares (as defined below),
shall be converted into the right to receive shares of EAI Common Stock at the
Exchange Ratio. The "Exchange Ratio" shall be determined as follows: each share
of VSA Stock shall be exchanged for that number of shares of EAI Common Stock
equal to the quotient, carried to six decimal places, of (x) the number obtained
by dividing (i) $26,000,000 by (ii) the total of the number of shares of VSA
Stock outstanding immediately prior to the Effective Time, divided by (y) the
EAI Stock Value. If, prior to the Effective Time, the outstanding shares of EAI
Common Stock or VSA Stock shall have been increased, decreased, changed into or
exchanged for a different number or kind of shares or securities as a result of
a reorganization, recapitalization, reclassification, stock dividend, stock
split, reverse stock split, or other similar change in capitalization, then an
appropriate and proportionate adjustment shall be made to the Exchange Ratio.
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(b) No fractional shares of EAI Common Stock shall be issued, and in lieu
thereof, EAI shall pay to each former stockholder of VSA who otherwise would be
entitled to receive such fractional share an amount in cash determined by
multiplying (i) the EAI Stock Value by (ii) the fraction of a share (rounded to
six decimal places when expressed as an Arabic number) of EAI Common Stock to
which such holder would otherwise be entitled to receive pursuant to this
Section 2.4.
(c) All of the shares of VSA Stock to be converted into EAI Common Stock
pursuant to this Article shall no longer be outstanding and shall automatically
be canceled and cease to exist at the Effective Time, and each VSA Certificate
shall thereafter represent the right to receive (i) a certificate representing
the number of whole shares of EAI Common Stock and (ii) cash in lieu of
fractional shares into which the shares of VSA Stock represented by such VSA
Certificate have been converted.
(d) Subject to the terms and conditions of this Agreement, shares of VSA
Stock with respect to which dissenters rights have been properly demanded in
accordance with the MBCA ("Dissenters' Shares") shall not be converted into EAI
Common Stock at the Effective Time, but shall be converted into the right to
receive from EAI such consideration as is determined to be due and payable with
respect to such Dissenters' Shares pursuant to the provisions of the MBCA. VSA
shall give EAI (i) prompt notice of any written demands for appraisals,
withdrawals or demands for appraisal and any other instruments in respect
thereof received by VSA and (ii) the opportunity to direct all negotiations and
proceedings with respect to demands for appraisal. VSA shall not voluntarily
make any payment with respect to any demands for appraisal and will not, except
with the prior written consent of EAI, settle or offer to settle any such
demands.
(e) At the Effective Time, all shares of VSA Stock that are owned by VSA as
treasury stock and all shares of VSA Stock that are owned, directly or
indirectly, by VSA or EAI or any wholly owned subsidiary of EAI shall be
canceled and shall cease to exist, and no stock of EAI or other consideration
shall be delivered in exchange therefor. All shares of EAI Common Stock that are
owned by VSA shall become treasury stock of EAI.
(f) After the Effective Time, there shall be no transfers on VSA's stock
transfer books of shares of VSA Stock.
2.5 Exchange of Shares. (a) At or any time after the Closing, each
stockholder of VSA shall have the right to deliver to EAI a properly completed
letter of transmittal in form reasonably satisfactory to EAI (the "Transmittal
Letter") and VSA Certificates representing all of the issued and outstanding
shares of VSA Stock owned by such stockholder, other than shares which are
Dissenter's Shares, duly endorsed for transfer or accompanied by duly executed
stock powers, free and clear of all options, liens, claims, charges,
restrictions and other encumbrances of any nature or kind whatsoever, other than
federal and state securities law restrictions. Upon proper surrender of a VSA
Certificate for exchange and cancellation to EAI, and in accordance with and
subject to the other provisions of this Agreement and the Transmittal Letter,
the holder of such VSA Certificate shall receive in exchange therefor (i) a
certificate representing that number of whole shares of EAI Common Stock to
which such holder of VSA Stock shall have become entitled, and (ii) a check
representing the amount of any cash in lieu of fractional shares which such
holder has the right to receive. The VSA Certificate so surrendered shall
forthwith be canceled. No interest shall be paid or accrued on any cash in lieu
of fractional shares payable to holders of VSA Certificates.
(b) If any certificate representing shares of EAI Common Stock is to be
issued in a name other than that in which the VSA Certificate surrendered in
exchange therefor is registered, it shall be a condition of the issuance thereof
that the VSA Certificate shall be properly endorsed (or accompanied by an
appropriate instrument of transfer) and otherwise in proper form for transfer,
and that the person requesting such exchange shall pay to EAI in advance any
transfer or other taxes required by reason thereof, or shall establish to the
satisfaction of EAI that such tax has been paid or is not payable.
(c) In the event any VSA Certificate shall have been lost, stolen or
destroyed, the person so claiming shall make an affidavit of that fact and
indemnify EAI against any claim that may be made against it with respect to such
VSA Certificate. Thereafter, EAI shall issue in exchange for such lost, stolen
or destroyed
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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
VSA Certificate the shares of EAI Common Stock and any cash in lieu of a
fractional share deliverable in respect thereof pursuant to this Agreement.
(d) At the Effective Time, all outstanding warrants, options, phantom
stock, convertible securities or any other rights to acquire shares of the
capital stock of VSA, if any such rights exist, shall be canceled and
extinguished without any conversion thereof or any payment with respect thereto.
Notwithstanding the foregoing, however, immediately prior to the Effective Time,
VSA shall be entitled to issue 3,498 shares of VSA Stock pursuant to certain
stock bonus agreements, which shares shall then be subject to conversion and
exchange as provided in Section 2.4 and 2.5 hereof (the "Bonus Shares").
ARTICLE III.
REPRESENTATIONS AND WARRANTIES OF VSA
Except as disclosed by VSA in the disclosure schedule delivered pursuant to
this Agreement (the "Disclosure Schedule"), VSA represents and warrants to EAI
and Sub as follows:
3.1. Corporate Organization. (a) VSA and the entities listed in Section
3.1(b) of the Disclosure Schedule that are designated as subsidiaries in such
Section ("Subsidiaries") are each a corporation duly organized, validly existing
and in good standing under the laws of its jurisdiction of incorporation, which
is set forth in Section 3.1(b) of the Disclosure Schedule. VSA and each
subsidiary have the corporate power and authority to own or lease all of their
respective properties and assets and to carry on their respective business as it
is now being conducted, and is duly licensed or qualified to do business and are
in good standing in each jurisdiction in which the nature of the business
conducted by them or the character or location of the properties and assets
owned or leased by them makes such licensing or qualification necessary, except
where the failure to be so licensed or qualified would not have a material
adverse effect on the business, properties, operations or financial condition (a
"Material Adverse Effect") of VSA and its Subsidiaries, taken as a whole.
Correct and complete copies of the Articles of Incorporation and By-Laws of VSA
and the charter documents and By-Laws of each Subsidiary, as in effect on the
date of this Agreement, have been made available to EAI by VSA. For purposes of
this Article III and Article VI, each reference to VSA shall also include each
Subsidiary, unless the context requires otherwise.
(b) Except as set forth in Section 3.1(b) of the Disclosure Schedule, VSA
does not own of record or beneficially, directly or indirectly, (i) any shares
of outstanding capital stock or securities convertible into capital stock of any
other corporation or (ii) any participating interest in any partnership, limited
liability company, joint venture or other non-corporate business.
3.2. Capitalization. The authorized capital stock of VSA consists of
100,000 shares of common stock, $1.00 par value per share, of which 69,970
shares are issued and outstanding as of the date hereof and 73,468 shares will
be issued and outstanding as of the Effective Time. No shares of VSA Stock are
held in VSA's treasury and no shares of VSA Stock are reserved for issuance
other than the Bonus Shares. All of the issued and outstanding shares of VSA
Stock have been duly authorized and validly issued and are fully paid,
nonassessable and free of preemptive rights. Other than the Bonus Shares and the
ESOP (as defined in Section 3.12), VSA does not have and is not bound by any
outstanding subscriptions, options, convertible securities, warrants, calls,
commitments or agreements of any character calling for the purchase or issuance
of any shares of its capital stock.
3.3. Authority; No Violation. (a) VSA has the corporate power and
authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly and
validly approved by the Board of Directors of VSA. Except for the adoption of
this Agreement by the requisite vote of holders of the issued and outstanding
shares of VSA Stock, no other corporate proceedings on the part of VSA are
necessary to approve this Agreement or to consummate the transactions
contemplated hereby. This Agreement has been duly and validly executed and
delivered by VSA and Stockholder and constitutes a valid
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VARIATION SYSTEMS ANALYSIS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
and binding obligation of VSA and Stockholder, enforceable against VSA and
Stockholder in accordance with its terms.
(b) The execution and delivery of this Agreement by VSA, the consummation
by VSA of the transactions contemplated hereby, and the compliance by VSA with
the terms or provisions hereof, shall not (i) violate any provision of the
Articles of Incorporation or By-Laws of VSA, (ii) violate any law, statute,
code, ordinance, rule, regulation, judgment, order, writ, decree or injunction
applicable to VSA or any of its properties or assets, or (iii) violate, conflict
with, breach any provision of or result in the loss of any benefit or the
increase in the amount of any liability or obligation under, constitute a
default (or an event which, with notice or lapse of time, or both, would
constitute a default) under, result in the termination of, accelerate the
performance required by, or result in the creation of any liens, pledges,
charges, encumbrances or security interests of any nature or kind (collectively,
"Liens") upon any of the properties or assets of VSA under any note, bond,
mortgage, indenture, deed of trust, license, lease, contract, agreement or other
instrument or obligation to which VSA is a party, or by which it or any of its
properties or assets may be bound or affected, which, in any such case, would
have a Material Adverse Effect on VSA.
3.4. Consents and Approvals. Except for (i) the filing of Certificate of
Merger with the Michigan Secretary pursuant to the MBCA, (ii) the approval of
this Agreement by the requisite vote of the holders of VSA Stock, and (iii) the
filing with the Securities and Exchange Commission (the "SEC") and declaration
of effectiveness of a Registration Statement on Form S-4 (the "S-4"), no
consent, approval or authorization of, or withholding of objection on the part
of, or filing, registration or qualification with, or notice to (collectively,
the "Consents") any court, administrative agency, commission or other
governmental authority or instrumentality, whether Federal, state, local or
foreign (each a "Governmental Authority"), or with any third party are necessary
in connection with the execution and delivery by VSA of this Agreement and the
consummation by VSA of the Merger and the other transactions contemplated by
this Agreement, except where the failure to obtain the same would not have a
Material Adverse Effect on VSA.
3.5. Reports. Except in each case where failure to do so would not have a
Material Adverse Effect on VSA, VSA has timely filed all reports, registrations
and statements required to be filed since January 1, 1995 with any Governmental
Authority and has paid all fees and assessments due and payable in connection
therewith. No Governmental Authority has initiated any proceeding or, to the
best knowledge of VSA, investigation into the business or operations of VSA.
3.6. Compliance with Applicable Law. VSA holds all licenses, franchises,
permits and authorizations necessary for the lawful conduct of its business
except where failure to hold the same would not have a Material Adverse Effect
on VSA. VSA has complied with and is not in default under any law, statute,
code, ordinance, rule, regulation, judgment, order, writ, decree or injunction
of any Governmental Authority applicable to VSA, except where the failure to be
in compliance would not have a Material Adverse Effect on VSA.
3.7. Financial Statements. VSA has previously provided EAI with correct
and complete copies of the unaudited balance sheets of VSA as of June 30, 1995,
1996, 1997 and 1998 and the related unaudited statements of income and retained
earnings and cash flows for the fiscal years ended June 30, 1995, 1996, 1997 and
1998 (collectively, the "VSA Financial Statements"). The VSA Financial
Statements fairly present in all material respects the financial position of VSA
as of the dates thereof, and the results of operations and cash flows of VSA for
the respective fiscal periods or as of the respective dates thereof. Each of the
VSA Financial Statements, including the notes thereto, has been, or shall be,
prepared in accordance with generally accepted accounting principles ("GAAP")
consistently applied during the periods involved, except that the same are not
audited and do not contain any required footnotes.
3.8. Absence of Certain Changes or Events. (a) Since June 30, 1998, (i)
VSA has not incurred any material liability that is not disclosed in the VSA
Financial Statements, (ii) no event has occurred which, individually or in the
aggregate, would have a Material Adverse Effect on VSA, and (iii) VSA has
carried on its business in the ordinary and usual course.
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VARIATION SYSTEMS ANALYSIS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(b) Since June 30, 1998, VSA has not (i) increased in any material respect
the salaries, wages, or other compensation, or pensions, fringe benefits or
other perquisites payable to any director, executive officer or other management
employee or to any non-management employee (except to the extent customary and
consistent with past practice), or (ii) granted any severance or termination
pay, or (iii) paid or accrued any bonuses or commissions (except to the extent
customary and consistent with past practice), or (iv) suffered any strike, work
stoppage, slowdown, or other labor disturbance which would, either individually
or in the aggregate, result in a Material Adverse Effect on VSA.
3.9. Legal Proceedings and Restrictions. (a) There are no actions, suits,
proceedings or, claims pending, or to the knowledge of VSA, threatened against
or affecting VSA at law or in equity or before any Governmental Authority.
(b) There is no judgment, order, writ, decree, injunction or regulatory
restriction imposed upon VSA or its assets which has not been satisfied and
which could reasonably be expected to have, a Material Adverse Effect on VSA.
3.10. Taxes and Tax Returns.
(a) (i) VSA (which term for purposes of this Section 3.10 shall
include any former subsidiaries of VSA for periods during which they were
owned) has filed correct and complete Returns in respect of Taxes required
to be filed; all Taxes shown on such Returns or otherwise known by VSA to
be due or payable by VSA have been paid; no adjustment relating to any such
Return has been proposed in writing by any Governmental Authority, except
proposed adjustments that have been resolved prior to the date hereof; and
there are no outstanding summons, subpoenas or written requests for
information with respect to any such Returns or the Taxes reflected
thereon. To VSA's knowledge, there is no reasonable basis for imposing any
additional Taxes on it other than the Taxes shown on such Returns. There
are no outstanding waivers or agreements extending the statute of
limitations for any period with respect to any Tax to which VSA is subject
and, to VSA's knowledge, VSA is not under audit by any Governmental
Authority for any Tax. There are no Tax liens on any assets of VSA other
than liens for Taxes not yet due or payable;
(ii) VSA has paid, on the basis of VSA's good faith estimate of the
required installments, all estimated Taxes required to be paid under
Section 6655 of the Code or any comparable provision of state, local or
foreign law; and all Taxes which shall be due and payable for any period or
portion thereof ending on or prior to the Closing Date shall have been paid
or shall be reflected on VSA's books as an accrued Tax liability, either
current or deferred. All Taxes required to be withheld, collected or
deposited by VSA during any taxable period for which the applicable statute
of limitations on assessment remains open have been timely withheld,
collected or deposited and, to the extent required, have been paid to the
relevant Governmental Authority;
(iii) For each taxable period for which the statute of limitations on
assessment remains open, VSA has not (A) been either a common parent
corporation or a member corporation of an affiliated group of corporations
filing a consolidated Federal income tax return, or (B) acquired any
corporation that filed a consolidated Federal income tax return with any
other corporation that was not also acquired by VSA; and no other entity
that was included in the filing of a Return with VSA on a consolidated,
combined, or unitary basis has left VSA's consolidated, combined or unitary
group in a taxable year for which the statute of limitations on assessment
remains open. VSA has not been at any time a member of any partnership,
limited liability company or joint venture or the holder of a beneficial
interest in any trust for any period for which the statute of limitations
for any Tax potentially applicable as a result of such membership or
holding has not expired;
(iv) No consent under Section 341(f) of the Code has been filed with
respect to VSA; and
(v) There is no significant difference on the books of VSA between the
amounts of the book basis and the tax basis of assets (net of liabilities)
that is not accounted for by an accrual on the books for Federal income tax
purposes.
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VARIATION SYSTEMS ANALYSIS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(b) VSA:
(i) Does not have any property that is or will be required to be
treated as being owned by another person under the provisions of Section
168(f)(8) of the Code (as in effect prior to amendment by the Tax Reform
Act of 1986) or is "tax-exempt use property" within the meaning of Section
168 of the Code;
(ii) Does not have any Tax sharing or allocation agreement or
arrangement (written or oral), does not owe any amount pursuant to any Tax
sharing or allocation agreement or arrangement, and will not have any
liability in respect to any Tax sharing or allocation agreement or
arrangement with respect to any entity that has been sold or disposed of;
(iii) Was not acquired in a qualified stock purchase under Section
338(d)(3) of the Code and no elections under Section 338(g) of the Code,
protective carryover basis elections, offset prohibition elections or other
deemed or actual elections under Section 338 are applicable to VSA;
(iv) Is not and has not been subject to the provisions of Section
1503(d) of the Code related to "dual consolidated loss" rules;
(v) Is not a party to any agreement, contract or arrangement that
would result, individually or in the aggregate, in the payment of any
"excess parachute payments" within the meaning of Section 280G of the Code
by reason of the Merger;
(vi) Does not have any income reportable for a period ending after the
Closing Date but attributable to an installment sale occurring in or a
change in accounting method made for a period ending on or prior to the
Closing Date which resulted in a deferred reporting of income from such
transaction or from such change in accounting method (other than a deferred
intercompany transaction), or deferred gain or loss arising out of any
deferred intercompany transaction;
(vii) Does not have any unused net operating loss, unused net capital
loss, unused tax credit, or excess charitable contribution for Federal
income tax purposes;
(viii) Is not a United States real property holding corporation as
defined in Section 897 of the Code ("USRPHC") and as of the Closing has not
been a USRPHC for the five year period immediately preceding the Closing
Date;
(ix) No withholding of Taxes by EAI will be required in this
transaction under Sections 3406 or 1445 of the Code or any other provision
of the Code or state, local or foreign law and VSA will provide any
required certificates to avoid any such withholding; and
(x) Is not a Small Business Corporation ("S" Corporation) as defined
in Section 1361(a) of the Code.
(c) For purposes of this Agreement:
(i) "Returns" means any and all returns, reports, information returns
and information statements with respect to Taxes required to be filed with
any Governmental Authority, including consolidated, combined and unitary
tax returns.
(ii) "Tax" or "Taxes" means any and all taxes, charges, fees, levies,
and other governmental assessments and impositions of any kind, payable to
any Governmental Authority, including income, franchise, net worth,
profits, gross receipts, minimum alternative, estimated, ad valorem, value
added, sales, use, service, real or personal property, capital stock,
license, payroll, withholding, disability, employment, social security,
Medicare, workers' compensation, unemployment compensation, utility,
severance, production, excise, stamp, occupation, premiums, windfall
profits, transfer and gains taxes, customs duties, imposts, charges, levies
or other similar assessments of any kind, and interest, penalties and
additions to tax imposed with respect thereto.
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VARIATION SYSTEMS ANALYSIS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3.11. Employee Benefits.
(a) VSA (which for purposes of this Section 3.11 shall include any ERISA
Affiliate (as hereinafter defined)) has not at any time within the past three
years, maintained, administered or contributed to any pension, profit-sharing,
thrift or 401(k), disability, medical, dental, health, life (including any
individual life insurance policy), death benefit, group insurance or any other
welfare plan, bonus, incentive, deferred compensation, stock purchase, stock
option, severance plan, salary continuation, vacation, holiday, sick leave,
fringe benefit, personnel policy, or similar plan, trust, program, policy,
commitment or arrangement whether or not covered by Employee Retirement and
Income Security Act of 1974, as amended ("ERISA") and whether or not funded or
insured and whether written or oral (hereinafter referred to as the "VSA
Plans"), which would result in EAI, VSA or the Surviving Corporation having any
material liabilities, whether direct or indirect.
(b) VSA has made available to EAI correct and complete copies of (i) each
VSA Plan document, amendments thereto and board resolutions adopting such plans
and amendments, (ii) each current summary plan description, (iii) any and all
agreements, insurance policies and other documents related to any VSA Plan, (iv)
the most recent determination letter from the Internal Revenue Service (the
"IRS") for each VSA Plan (as applicable), and (v) the three most recent Annual
Reports -- Form 5500 (including accompanying schedules) and summary annual
reports for each VSA Plan.
(c) (i) Each VSA Plan and VSA have at all times complied in all material
respects with the applicable requirements of ERISA, the Code and any other
applicable law (including regulations and rulings thereunder), and the VSA Plans
have at all times been properly administered in all material respects in
accordance with all such laws, including reporting and disclosure requirements
under ERISA and the Code, and with the terms of each applicable plan document,
(ii) each of the VSA Plans intended to be "qualified" within the meaning of Code
Section 401(a) is so qualified and, to VSA's knowledge, no facts exist that
would reasonably be expected to affect adversely such "qualified" status, (iii)
no VSA Plan provides benefits, including, without limitation, death or medical
benefits (whether or not insured), for current or former employees following
their retirement or other termination of service, other than coverage mandated
by applicable statutes or death benefits or retirement benefits under any
"employee pension plan" (as such term is defined in ERISA Section 3(2)), (iv)
there has not occurred nor, to the knowledge of VSA, is any person contractually
bound to enter into any non-exempt "prohibited transaction" within the meaning
of Code Section 4975 or ERISA Section 406 with respect to a VSA Plan, (v) VSA
has not engaged in a transaction which would subject it to either a civil
penalty under ERISA Section 409 or a tax under Code Section 4976, (vi) there are
no pending, or, to VSA's knowledge, threatened claims (other than routine claims
for benefits) by, on behalf of or against VSA, any of the VSA Plans or any
trusts related thereto, (vii) VSA has made or caused to be made on a timely
basis any and all contributions, premiums and other amounts due and owing under
the terms of any VSA Plan or as otherwise required by applicable law with
respect to a VSA Plan, (viii) VSA has in all respects complied with Code Section
4980B and other applicable laws concerning the continuation of employer-provided
health benefits following a termination of employment or any other event that
would otherwise terminate such coverage, (ix) VSA has in all respects complied
with Section 9801 of the Code concerning the portability of employee health
coverage, (x) VSA has not at any time maintained, administered or contributed to
any plan subject to ERISA Title IV, and (xi) VSA has not at any time
participated in, made contributions to or had any other liability with respect
to a "multiemployer plan" under ERISA Section 4001, a "multiple employer plan"
under Code Section 413(c), or a "multiple employer welfare arrangement" under
ERISA Section 3(40).
(d) Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby (other than as provided in
Section 6.10) will (i) result in any material payment (including, without
limitation, severance, unemployment compensation, golden parachute or otherwise)
becoming due to any director, officer or employee of VSA, (ii) increase in any
material respect any benefits otherwise payable under any VSA Plan, or (iii)
result in any acceleration of the time of payment or vesting of any such
benefits.
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VARIATION SYSTEMS ANALYSIS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(e) There are no actions, claims or audits pending or, to VSA's knowledge,
threatened with respect to any VSA Plan (other than claims for benefits in the
ordinary course) that will create any liability or obligation for the Surviving
Corporation with respect to any VSA Plan participant, beneficiary, alternate
payee or other claimant, or with respect to any Governmental Authority,
including, but not limited to, the IRS, the Department of Labor and the Pension
Benefit Guaranty Corporation.
(f) For purposes of this Agreement, "ERISA Affiliate" means VSA and (i) any
corporation that is a member of a controlled group of corporations within the
meaning of Section 414(b) of the Code of which VSA is a member, (ii) any trade
or business (whether or not incorporated) which is a member of a group of trades
or businesses under common control within the meaning of Section 414(c) of the
Code of which VSA is a member; and (iii) any member of an affiliated service
group within the meaning of Section 414(m) or (o) of the Code of which VSA, any
corporation described in clause (i) above or any trade or business described in
clause (ii) above is a member.
3.12. ESOP.
(a) Comerica Bank constitutes the sole trustee (the "ESOP Trustee") of the
Variation Systems Analysis, Inc. Employee Stock Ownership Plan (the "ESOP"), and
Trustee has been duly appointed a Trustee of the ESOP.
(b) The ESOP has been duly adopted by the Board of Directors of VSA and
executed on behalf of VSA and the ESOP Trustee. The ESOP meets all requirements
of an "employee stock ownership plan" as defined in Section 4975(e)(7) of the
Code, and the ESOP trust is a trust duly formed in accordance with its trust
agreement and Michigan law, and is validly existing under the laws of the State
of Michigan.
(c) The ESOP Trustee is the sole registered owner of 6243.78 shares of VSA
Stock, not in its individual capacity, but solely in its capacity as ESOP
Trustee.
(d) There is no "Qualified Loan" (as defined in the ESOP) outstanding.
3.13. Employment and Labor Relations. To the knowledge of VSA, no
executive, key employee or group of employees has any plans to terminate its or
their employment with VSA. There are no charges, complaints, investigations or
litigation currently pending, or to the knowledge of VSA threatened against VSA,
relating to alleged employment discrimination, unfair labor practices, equal pay
discrimination, affirmative action noncompliance, occupational safety and
health, breach of employment contract, employee benefit matters, wrongful
discharge or other employment-related matters, which, if determined adversely to
VSA would have a Material Adverse Effect on VSA. There are no outstanding orders
or charges against VSA under any applicable occupational safety and health laws
in any jurisdiction in which VSA conducts business which would result in a
Material Adverse Effect on VSA. All levies, assessments and penalties made
against VSA pursuant to any applicable workers' compensation legislation in any
jurisdiction in which VSA conducts business have been paid by VSA. VSA is not a
party to any contracts with any labor union or employee association nor has VSA
made commitments to or conducted negotiations with any labor union or employee
association with respect to any future contracts. VSA is not aware of any
current attempts to organize or establish any labor union or employee
association with respect to any employees of VSA, and there is no existing or
pending certification of any such union with regard to a bargaining unit.
3.14. Contracts. Section 3.14 of the Disclosure Schedule lists or
describes the following contracts, agreements, licenses, permits, arrangements,
commitments or understandings (whether written or oral) which are currently in
effect or which will, without any further action on the part of VSA become
effective in the future, to which VSA is a party (collectively, the "VSA
Contracts"):
(a) any agreement for the lease of personal property or real property to or
from any person or entity that individually involves an expenditure by the
lessee of in excess of $10,000 in any one year;
(b) any agreement for the purchase, sale or distribution of products,
materials, commodities, supplies or other personal property, or for the
furnishing or receipt of services, the performance of which will extend over a
period of more than one year or involve consideration payable by any party in
excess of $10,000 in any one year;
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(c) any agreement creating, governing or providing for an investment or
participation in a partnership, limited liability company or joint venture;
(d) any agreement under which VSA has created, incurred, assumed or
guaranteed any indebtedness for borrowed money, or any capitalized lease
obligation, or under which VSA has imposed a Lien on any of its assets;
(e) any agreement outside the ordinary course of business imposing any
obligations on VSA of confidentiality or noncompetition;
(f) any written agreement with any director, officer, employee or
stockholder of VSA or any of their affiliates;
(g) any pension, profit sharing, thrift or 401(k), bonus, incentive,
deferred compensation, stock purchase, stock option, severance, salary
continuation or other material plan or arrangement for the benefit of current or
former directors, officers or employees;
(h) any agreement for the employment of any individual on a full-time,
part-time, consulting or other basis which is not terminable by VSA upon thirty
(30) days' notice or less without payment of any termination fee, severance or
other penalty by VSA;
(i) any agreement relating to any Intellectual Property (as that term is
defined in Section 3.18) used by VSA and which is material to the conduct of its
business, or that is licensed by VSA for use by others;
(j) any agreement under which the consequences of a default, termination or
acceleration would have a Material Adverse Effect on VSA; or
(k) any other agreement the performance of which involves consideration
payable by VSA in excess of $10,000 in any one year.
VSA has made available to EAI a correct and complete copy of each VSA
Contract. Except as set forth in Section 3.14 of the Disclosure Schedule, (i)
each VSA Contract is legal, valid, binding, enforceable in accordance with its
terms and in full force and effect, (ii) the consummation of the Merger will not
cause a breach or termination of any VSA Contract nor effect a change in any of
the terms of any VSA Contract which, in any such case, would have a Material
Adverse Effect on VSA, (iii) VSA is not, and, to VSA's knowledge, no other party
is, in breach or default in any material respect of any VSA Contract and no
event has occurred which with notice or lapse of time, or both, would constitute
a breach or default by VSA that would result in or permit termination,
modification or acceleration under any VSA Contract, and (iv) VSA has not, and,
to VSA's knowledge, no other party has, repudiated any provision of any VSA
Contract.
3.15. Undisclosed Liabilities. Except for liabilities (i) that are fully
reflected or reserved against on the June 30, 1998 balance sheet of VSA included
in the VSA Financial Statements (the "1998 Balance Sheet") or (ii) that were
incurred in the ordinary course of business consistent with past practice since
June 30, 1998, or (iii) that are fully reflected or reserved against in the VSA
Financial Statements, VSA has not incurred any material liability of any nature
whatsoever (whether absolute, accrued, contingent or otherwise and whether due
or to become due).
3.16. Environmental Liability.
(a) VSA has not received any notice, and does not otherwise have knowledge,
of any claim, and no proceeding has been instituted raising any claim, against
VSA or any of the real properties now or formerly owned, leased or operated by
VSA or other assets of VSA, alleging any material damage to the environment or
violation of any Environmental Laws;
(b) VSA does not have knowledge of any facts which would give rise to any
claim, public or private, of violation in any material respect of Environmental
Laws or material damage to the environment emanating from, occurring on or in
any way related to real properties now or formerly owned, leased or operated by
VSA or to other assets of VSA or their use;
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(c) VSA has not stored or released any Hazardous Materials on real
properties now or formerly owned, leased or operated by it or disposed of any
Hazardous Materials, in each case in a manner contrary in any material respect
to any Environmental Laws; and
(d) All buildings on all real properties now owned, leased or operated by
VSA are in compliance with applicable Environmental Laws, except where the
failure to comply would not reasonably be expected to result in a Material
Adverse Effect on VSA.
(e) For purposes of this Agreement,
(i) "Environmental Laws" means any and all Federal, state, county,
local and foreign laws, statutes, codes, ordinances, rules, regulations,
judgments, orders, decrees, permits, concessions, grants, franchises,
licenses, agreements or governmental restrictions relating to pollution and
the protection of the environment or the release of any materials into the
environment, including but not limited to those related to hazardous
substances or wastes, air emissions and discharges to waste or public
systems; and
(ii) "Hazardous Material" means any and all "hazardous substances",
"hazardous wastes", "hazardous materials", "extremely hazardous wastes",
"restricted hazardous wastes", "toxic substances", "toxic pollutants" or
words of similar import, under any of the Environmental Laws.
3.17. Tangible Assets. VSA has good and marketable title to, or a valid
leasehold interest in, the properties and assets used by it, located on its
premises, shown on the 1998 Balance Sheet or acquired after the date thereof,
except for properties and assets disposed of in the ordinary course of business,
free and clear of all Liens. VSA owns or leases pursuant to a VSA Contract all
buildings, machinery, equipment and other tangible assets material to the
conduct of its business as presently conducted. Each such tangible asset is free
from defects (patent and latent) other than defects that do not individually or
in the aggregate materially impair its value or intended use, has been
maintained in accordance with normal industry practice, is in reasonably good
operating condition and repair (subject to normal wear and tear). Section 3.17
of the Disclosure Schedule contains a schedule of such tangible assets owned or
leased by VSA that have a value in excess of $10,000.
3.18. Real Property. VSA does not own any real property. Section 3.18 of
the Disclosure Schedule lists and describes briefly all real property leased or
subleased to VSA. VSA has made available to EAI correct and complete copies of
each such lease and sublease. Except as set forth in Section 3.18 of the
Disclosure Schedule:
(a) each such lease or sublease is legal, valid, binding, enforceable and
in full force and effect;
(b) the consummation of the transactions contemplated hereby will neither
cause the termination of each such lease or sublease nor effect a change in any
of its terms;
(c) VSA is not, and, to the knowledge of VSA, no other party to such lease
or sublease is, in breach or default in any material respect, and no event has
occurred which, with notice or lapse of time, or both, would constitute a breach
or default by VSA that would permit termination, modification or acceleration
thereunder;
(d) neither VSA nor, to the knowledge of VSA, any other party to each such
lease or sublease has repudiated or disputed any provision thereof;
(e) VSA has not assigned, transferred, conveyed, mortgaged, deeded in trust
or encumbered any interest in any leasehold or subleasehold.
3.19. Intellectual Property. (a) Section 3.19 of the Disclosure Schedule
identifies each patent, trademark, service mark, trade name, assumed name,
copyright, trade secret, license to or from third parties with respect to any of
the foregoing, applications to register or registrations of any of the foregoing
or other intellectual property rights which are material to the business of VSA
and are owned or used by or have been issued to VSA (collectively the
"Intellectual Property"). VSA has made available correct and complete copies of
all patents, trademarks, copyrights, registrations, licenses, permits,
agreements and applications related to the Intellectual Property to EAI and
correct and complete copies of all other written documentation
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evidencing ownership of or the right to use each such item. Except as set forth
in Section 3.19 of the Disclosure Schedule:
(i) VSA possesses all right, title and interest in and to the
Intellectual Property, free and clear of any Lien or other restriction;
(ii) the legality, validity, enforceability, ownership or use of the
Intellectual Property is not currently being challenged, nor to the
knowledge of VSA is there any reasonable basis for any such challenge;
(iii) VSA has taken all necessary action to maintain the patents
listed on Section 3.19 of the Disclosure Schedule in effect and will
continue to maintain those rights in effect prior to the Closing so as not
to affect materially the validity or enforcement thereof; and
(iv) the Intellectual Property will be owned or available for use by
the Surviving Corporation immediately subsequent to the Closing on the same
terms and conditions (except as contemplated by the Intellectual Property
Assignment described in Section 6.12) as in effect immediately prior to the
Closing and the transactions contemplated by this Agreement will have no
Material Adverse Effect on VSA's rights, title and interest in and to any
of the rights set forth in Section 3.19 of the Disclosure Schedule.
(b) To the knowledge of VSA, (i) VSA has not interfered with, infringed
upon, misappropriated or otherwise come into conflict with any intellectual
property rights of third parties, nor is VSA currently interfering with,
infringing upon, misappropriating or otherwise coming into conflict with any
intellectual property rights of third parties, in each case in any manner which
would have a Material Adverse Effect on VSA and (ii) to VSA's knowledge, no
third party has, in the past three years, interfered with, infringed upon,
misappropriated or otherwise come into conflict with any Intellectual Property
rights of VSA that would result in a Material Adverse Effect on VSA, nor, to
VSA's knowledge, is any third party currently interfering with, infringing upon,
misappropriating or otherwise coming into conflict with any Intellectual
Property rights of VSA.
3.20. Notes and Accounts Receivable. All notes and accounts receivable of
VSA have arisen in the ordinary course of business, and to the knowledge of VSA
are not subject to any setoff or counterclaim and are collectible, subject only
to the reserve for bad debts, if any, established in accordance with the past
practice of VSA.
3.21. Bank Accounts and Powers of Attorney. Section 3.21 of the Disclosure
Schedule sets forth a list of all accounts and deposit boxes maintained by VSA
at any bank or other financial institution and the names of the persons
authorized to effect transactions in such accounts and with access to such
boxes. There are no outstanding powers of attorney executed on behalf of VSA.
3.22. Guaranties. VSA is not a guarantor or otherwise is liable for any
indebtedness, liability or other obligation of any other person or entity.
3.23. Insurance. Section 3.24 of the Disclosure Schedule lists each
insurance policy and self-insurance arrangement to which VSA is a party, a named
insured or otherwise the beneficiary of, specifying the insurer, type of
insurance, policy number and pending claims thereunder with respect to VSA. VSA
is in compliance in all material respects with all conditions contained in such
policies.
3.24. Service Contracts and Warranties. VSA is not a party to any service
contract pursuant to which any material services are provided by VSA to a third
party. Section 3.24 of the Disclosure Schedule includes copies of the standard
terms and conditions of all product warranties and service or maintenance
contracts currently granted or entered into by VSA.
3.25. Certain Relationships. No stockholder, director, officer or, to
VSA's knowledge, employee of VSA (i) is, or controls, or is an employee of any
competitor, supplier, customer or lessor or lessee of VSA, or (ii) is indebted
to VSA in an amount in excess of $10,000 in any individual case, or (iii) owns
any asset, tangible or intangible, which is used in the business of VSA, other
than assets that are immaterial in value; and VSA has not entered into any
transaction (including the furnishing of goods or services) with any
stockholder,
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director, officer, employer or other affiliate, except on terms and conditions
no less favorable to VSA than would be obtained in a comparable arm's-length
transaction with a third party.
3.26. S-4 Information. None of the written information to be supplied by
VSA for inclusion in the S-4 will, at the time the S-4 is filed with the SEC, at
any time it is amended or supplemented, at the time it becomes effective under
the Securities Act of 1933, as amended (the "Securities Act"), or at the Closing
Date, contains any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading. Notwithstanding the foregoing, VSA makes no
representation or warranty with respect to statements made in the S-4 based on
written information supplied by EAI specifically for inclusion therein.
3.27. Broker's Fees. Neither VSA nor any of its directors, officers or
employees has employed any person or entity as a broker, finder or agent or
incurred any liability for any broker's fees, finder's fees or other commission
in connection with the Merger or the related transactions contemplated by this
Agreement.
3.28 Certain Customer Relationships. Section 3.38 of the Disclosure
Schedule contains a complete and accurate list of VSA's ten largest customers
(in terms of dollar sales by VSA) for the fiscal year ending June 30, 1998 (the
"Primary Customers"), together with the total dollar amount of all sales by VSA
to such Primary Customers during such period. VSA has not received any written
notice that any Primary Customer intends to reduce in any material respect the
dollar amount of sales by VSA in the year ending June 30, 1999 from the year
ended June 30, 1998.
3.29. Disclosure. No representation or warranty by VSA contained in this
Agreement (including the Disclosure Schedule and the Exhibits referred to
herein), or in any certificate furnished or to be furnished by VSA to EAI in
connection with the transactions contemplated hereby contains or will contain
any untrue statement of a material fact, or omits or will omit to state any
material fact required to make the statements herein or therein not misleading.
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES OF EAI
EAI represents and warrants to VSA and Stockholder as follows:
4.1. Corporate Organization. EAI is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware. EAI has
the corporate power and authority to own or lease all of its properties and
assets and to carry on its business as it is now being conducted, and is duly
licensed or qualified to do business and is in good standing in each
jurisdiction in which the nature of the business conducted by it or the
character or location of the properties and assets owned or leased by it makes
such licensing or qualification necessary, except where the failure to be so
licensed or qualified could not have a Material Adverse Effect on EAI and its
subsidiaries, taken as a whole. Correct and complete copies of the Certificate
of Incorporation and By-Laws of EAI, as in effect as of the date of this
Agreement, have been made available to VSA by EAI.
4.2. Capitalization. The authorized capital stock of EAI consists of
60,000,000 shares of EAI Common Stock, of which as of May 11, 1998, 10,213,195
shares were issued and outstanding, and 20,000,000 shares of preferred stock,
$.01 par value per share, none of which is issued and outstanding. All of the
issued and outstanding shares of EAI Common Stock have been duly authorized and
validly issued and are fully paid, nonassessable and free of preemptive rights,
with no personal liability attaching to the ownership thereof. The shares of EAI
Common Stock to be issued pursuant to the Merger will be duly authorized and
validly issued and, at the Effective Time, all such shares will be fully paid,
nonassessable and free of preemptive rights, with no personal liability
attaching to the ownership thereof.
4.3. Authority; No Violation. (a) EAI has the corporate power and
authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly and
validly
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approved by the Board of Directors of EAI. No other proceedings or approvals on
the part of EAI are necessary to approve this Agreement or to consummate the
transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by EAI and constitutes a valid and binding obligation of
EAI, enforceable against EAI in accordance with its terms.
(b) The execution and delivery of this Agreement by EAI, the consummation
by EAI of the transactions contemplated hereby, and the compliance by EAI with
the terms or provisions hereof, will not (i) violate any provision of the
Certificate of Incorporation or By-Laws of EAI, (ii) violate any law, statute,
code, ordinance, rule, regulation, judgment, order, writ, decree or injunction
applicable to EAI or any of its properties or assets, or (iii) violate, conflict
with, breach any provision of or result in the loss of any benefit under,
constitute a default (or an event which, with notice or lapse of time, or both,
would constitute a default) under, result in the termination of, accelerate the
performance required by, or result in the creation of any Lien upon any of the
properties or assets of EAI under any note, bond, mortgage, indenture, deed of
trust, license, lease, contract, agreement or other instrument or obligation to
which EAI is a party, or by which it or any of its properties or assets may be
bound or affected.
4.4. Consents and Approvals. Except for (i) the filing of Certificate of
Merger with the Michigan Secretary pursuant to the MBCA, the filing with the SEC
and declaration of effectiveness of the S-4 and (ii) the filings and
authorizations necessary to list the shares of EAI Common Stock issued pursuant
to this Agreement on the NNM, no Consents from any Governmental Authority or any
third party are necessary in connection with the execution and delivery by EAI
of this Agreement and the consummation by EAI of the Merger and the other
transactions contemplated by this Agreement.
4.5. SEC Reports. The annual report on Form 10-K of EAI for the fiscal
year ended December 31, 1997, as filed under the Securities Exchange Act of 1934
("Exchange Act"), and all other reports and proxy statements filed or required
to be filed by EAI subsequent to such report (collectively, the "EAI SEC
Documents"), have been duly and timely filed by EAI, complied in all material
respects with all requirements under the Exchange Act and the rules and
regulations promulgated thereunder, were true and correct in all material
respects as of the dates at which the information was furnished, and contained
no untrue statement of a material fact or omitted to state a material fact
necessary in order to make the statements made, in the light of the
circumstances under which they were made, not misleading. The financial
statements of EAI included in the EAI SEC Documents complied in all material
respects with applicable accounting requirements and the published rules and
regulations of the SEC with respect thereto, have been prepared in accordance
with GAAP (except, in the case of interim financial statements, as permitted by
Forms 10-Q or 8-K of the SEC) consistently applied during the periods involved
(except as may be indicated in the notes thereto) and fairly presented, in
accordance with the applicable requirements of GAAP, the financial position of
EAI as of the dates thereof and the results of operations and cash flows for the
periods then ended (subject, in the case of interim financial statements, to
normal year-end adjustments). Except as set forth in the EAI SEC Documents or as
incurred in the ordinary course of business since the date of the most recent
EAI SEC Documents. EAI does not have any liabilities or obligations of any
nature (whether accrued, absolute, contingent or otherwise) required by GAAP to
be set forth in a balance sheet of EAI which would have a Material Adverse
Effect on EAI.
4.6. S-4 Information. None of the information that EAI will include or
incorporate by reference in the S-4 will, at the time the S-4 is filed with the
SEC, at any time it is amended, supplemented, or at the time it becomes
effective under the Securities Act or at the Closing Date, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading. The
S-4 will comply as to form in all material respects with the requirements of the
Securities Act and the rules and regulations promulgated thereunder.
Notwithstanding the foregoing, EAI makes no representation or warranty with
respect to statements made in the S-4 based on written information supplied by
VSA specifically for inclusion therein.
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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4.7. Ownership of Sub; No Prior Activities.
(a) Sub was formed for the purpose of engaging in the transactions
contemplated by this Agreement.
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(b) As of the Effective Time, all of the outstanding capital stock of Sub
will be owned directly by EAI. As of the Effective Time, there will be no
options, warrants or other rights (including registration rights), agreements,
arrangements or commitments to which Sub is a party of any character relating to
the issued or unissued capital stock of, or other equity interests in, Sub or
obligating Sub to grant, issue or sell any shares of the capital stock of, or
other equity interests in, Sub, by sale, lease, license or otherwise. There are
no obligations, contingent or otherwise, of Sub to repurchase, redeem or
otherwise acquire any shares of the capital stock of Sub.
(c) As of the date hereof and the Effective Time, except for obligations or
liabilities incurred in connection with its incorporation or organization and
the transactions contemplated by this Agreement, Sub has not and will not have
incurred, directly or indirectly, through any affiliate, any obligations or
liabilities or engaged in any business activities of any type or kind whatsoever
or entered into any agreements or arrangements with any person.
4.8. Broker's Fees. Neither EAI nor any of its directors, officers or
employees has employed any person or entity as a broker, finder or agent or
incurred any liability for any broker's fees, finder's fees or other commission
in connection with the Merger or the related transactions contemplated by this
Agreement.
4.9. Absence of Certain Changes or Events. Since December 31, 1997, except
as disclosed in the EAI SEC Documents, no event has occurred which would have a
Material Adverse Effect on EAI.
4.10 Legal Proceedings and Restrictions. There are no actions, suits,
proceedings or claims that require disclosure by EAI pursuant to Item 103 of
Regulation S-K promulgated under the Exchange Act.
4.11. Compliance With Applicable Law. EAI has complied with and is not in
default under any law, statute, code, ordinance, rule, regulation, judgment,
order, writ, decree or injunction of any Governmental Authority applicable to
EAI, except where the failure to be in compliance would not have a Material
Adverse Effect on EAI.
4.12. Intellectual Property. To the knowledge of EAI, (a) EAI has not
interfered with, infringed upon, misappropriated or otherwise come into conflict
with any intellectual property rights of third parties, nor is EAI currently
interfering with, infringing upon, misappropriating or otherwise coming into
conflict with any intellectual property rights of third parties, in each case in
any manner which would have a Material Adverse Effect on EAI, and (b) to EAI's
knowledge, no third party has, in the past three years, interfered with,
infringed upon, misappropriated or otherwise come into conflict with any
intellectual property rights of EAI that would result in a Material Adverse
Effect on EAI, nor, to EAI's knowledge, is any third party currently interfering
with, infringing upon, misappropriating or otherwise coming into conflict with
any intellectual property rights of EAI.
4.13. Disclosure. No representation or warranty by EAI contained in this
Agreement, or in any certificate furnished or to be furnished by EAI to VSA or
Stockholder in connection with the transactions contemplated hereby contains or
will contain any untrue statement of a material fact, or omits or will omit to
state any material fact required to make the statements herein or therein not
misleading.
ARTICLE V.
COVENANTS RELATING TO CONDUCT OF BUSINESS
5.1. Conduct of Business Prior to the Effective Time. During the period
from the date of this Agreement to the Effective Time, except as expressly
contemplated or permitted by this Agreement, VSA shall (i) conduct its business
in the usual, regular and ordinary course consistent with past practice, (ii)
use its reasonable efforts to maintain and preserve intact its business
organization and advantageous business relationships and retain the services of
its key officers and employees and (iii) take no action which would materially
and adversely affect or delay the ability of VSA or EAI to obtain any necessary
approvals of any Governmental Authority required for the transactions
contemplated hereby or to perform its covenants and agreements under this
Agreement. During the period from the date of this Agreement to the Effective
Time,
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except as expressly contemplated or permitted by this Agreement, EAI shall take
no action which would materially and adversely affect or delay the ability of
VSA or EAI to obtain any necessary approvals of any Governmental Authority
required for the transactions contemplated hereby or to perform its covenants
and agreements under this Agreement.
5.2. VSA Forbearances. During the period from the date of this Agreement
to the Effective Time, except as expressly contemplated or permitted by this
Agreement, VSA shall not, without the prior written consent of EAI:
(a) incur any indebtedness for borrowed money (except pursuant to existing
funded debt agreements described in Section 3.14 of the Disclosure Schedule),
assume, guarantee, endorse or otherwise as an accommodation, become responsible
for the obligations of any other individual, partnership, limited liability
company, corporation or other entity (collectively, "Person"), or make any loan
or advance;
(b) (i) adjust, split, combine or reclassify any capital stock; (ii) make,
declare or pay any dividend, or make any other distribution on, or directly or
indirectly redeem, purchase or otherwise acquire, any shares of its capital
stock or any securities or obligations convertible into or exchangeable for any
shares of its capital stock, (iii) grant any Person any right to acquire any
shares of its capital stock, or (iv) issue any additional shares of capital
stock other than the Bonus Shares;
(c) sell, transfer, mortgage, encumber or otherwise dispose of any of its
properties or assets to any Person, or cancel or release any indebtedness or
claims owed to or held by VSA or by any Person, except in the ordinary course of
business consistent with past practice;
(d) make any investment in any Person by purchase of securities,
contributions to capital, property transfers, or purchase of any property or
assets of any other Person;
(e) except for transactions in the ordinary course of business consistent
with past practice, enter into or terminate any VSA Contract, or change any
terms in any VSA Contract, other than renewals or changes in immaterial terms
thereof;
(f) increase in any material respect the compensation or fringe benefits of
any of its directors, officers or employees other than in the ordinary course of
business consistent with past practice, pay any pension or retirement allowance
not required by any existing plan or agreement to any of the foregoing, or
become a party to, amend or commit itself to, any pension, retirement,
profit-sharing or welfare benefit plan or agreement or employment agreement with
or for the benefit of any of the foregoing;
(g) settle any claim, action or proceeding involving money damages, except
in the ordinary course of business consistent with past practice;
(h) take any action that would prevent or impede the Merger from qualifying
(i) for "pooling of interests" accounting treatment, or (ii) as a reorganization
within the meaning of Section 368 of the Code;
(i) amend its Articles of Incorporation or By-Laws; or
(j) take any action that is intended or may reasonably be expected to
result in (i) any of its representations and warranties set forth in this
Agreement being or becoming untrue in any material respect, or (ii) any of the
conditions to the Merger set forth in Article VII not being satisfied or (iii)
any violation of any provision of this Agreement, except, in each case, as may
be required by applicable law.
5.3. EAI Forbearances. During the period from the date of this Agreement
to the Effective Time, except as expressly contemplated or permitted by this
Agreement, EAI shall not, without the prior written consent of VSA:
(a) make, declare or pay any cash dividend or other cash distribution on
any shares of its capital stock;
(b) sell, transfer, mortgage, encumber or otherwise dispose of
substantially all of its properties or assets;
(c) merge, amalgamate, consolidate or enter into a share exchange (or cause
or permit any of its subsidiaries to merge, amalgamate, consolidate or enter
into a share exchange) with any other Person, except,
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in any such case, in connection with the acquisition by EAI or a subsidiary of
EAI of the stock and/or assets of any Person; provided, however, in no event
shall EAI issue an aggregate amount of shares as a result of such transactions
in excess of the number of shares outstanding as of the date hereof;
(d) take any action that would prevent or impede the Merger from qualifying
(i) for "pooling of interests" accounting treatment, or (ii) as a reorganization
within the meaning of Section 368 of the Code;
(e) amend its Articles of Incorporation or By-Laws in any manner which
would effect the EAI Common Stock; or
(f) take any action that is intended or may reasonably be expected to
result in (i) any of its representations and warranties set forth in this
Agreement being or becoming untrue in any material respect, or (ii) any of the
conditions to the Merger set forth in Article VII not being satisfied or (iii)
any violation of any provision of this Agreement, except, in each case, as may
be required by applicable law.
ARTICLE VI.
ADDITIONAL AGREEMENTS
6.1. Regulatory and Other Matters. (a) EAI, with the cooperation of VSA,
shall promptly prepare and file the S-4 with the SEC and use its reasonable best
efforts to have the S-4 declared effective under the Securities Act as promptly
as practicable after such filing and to maintain its effectiveness through the
Closing Date. VSA shall, upon request, furnish EAI with all information or
documents concerning VSA and its directors, officers and stockholders and such
other matters as may be reasonably necessary or advisable in connection with the
S-4. EAI shall also use its reasonable best efforts to obtain all necessary
state securities law or "Blue Sky" qualifications, permits and approvals
required to carry out the transactions contemplated by this Agreement, and VSA
shall furnish all information concerning VSA and the holders of VSA Stock as may
be reasonably requested by EAI in connection with such qualifications, permits
and approvals.
(b) The parties shall cooperate with each other and use their reasonable
best efforts to prepare and file promptly all necessary documentation to effect
all applications, notices, petitions and filings and to obtain as promptly as
practicable all Consents of Governmental Authorities and third parties which are
necessary or advisable to consummate the Merger and the other transactions
contemplated by this Agreement, and the parties shall keep each other apprised
of the status of matters relating to completion of the transactions contemplated
herein.
6.2. Access to Information. Subject to the existing confidentiality
agreement between EAI and VSA, upon reasonable notice, VSA shall afford to the
officers, employees, accountants, counsel and other representatives of EAI
access during normal business hours during the period prior to the Effective
Time to all of VSA's books and records, properties and contracts, and, during
such period, VSA shall make available to EAI all information concerning its
business, assets and personnel as EAI may reasonably request.
6.3. Stockholders' Approval. VSA shall call a meeting of its stockholders
for the purpose of voting upon the adoption of this Agreement and the Merger,
which meeting shall be held as soon as reasonably practicable after the S-4 is
declared effective by the SEC.
6.4. NNM Listing. EAI shall cause the shares of EAI Common Stock to be
issued in the Merger to be approved for listing on the NNM, subject to official
notice of issuance, prior to the Effective Time.
6.5. Affiliates. Prior to the Effective Time, VSA shall obtain from each
of the stockholders listed in Section 6.5 of the Disclosure Schedule as being
"affiliates" of VSA a written agreement substantially in the form attached as
Exhibit A (the "Affiliate Letter").
6.6. Additional Agreements. In case at any time after the Effective Time
any further action is necessary or desirable to carry out the purposes of this
Agreement or to vest the Surviving Corporation with full title to all
properties, assets, rights, approvals, immunities and franchises of any of the
parties to the Merger, the proper officers and directors of each party to this
Agreement shall take all such necessary or advisable action.
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6.7. Advice of Changes. EAI and VSA shall promptly advise each other of
any change or event which is likely to have a Material Adverse Effect on each
other or which EAI or VSA believes would or would be reasonably likely to cause
or constitute a material breach of any of its representations, warranties or
covenants contained herein.
6.8. Takeover Proposals. (a) VSA agrees that from and after its execution
of this Agreement through the Effective Time, it shall not and it shall use its
reasonable best efforts to cause the directors, officers, employees and
stockholders, and all investment bankers, attorneys or other advisors or
representatives retained by VSA not to, (i) solicit or encourage the submission
of any Takeover Proposal (as hereinafter defined), (ii) participate in any
discussions or negotiations regarding, or furnish to any third party any
information with respect to, or take any other action to facilitate any
inquiries or the making of any proposal that constitutes, a Takeover Proposal,
(iii) make or authorize any statement or recommendation in support of any
Takeover Proposal, or (iv) enter into any agreement with respect to any Takeover
Proposal.
(b) Notwithstanding the foregoing paragraph (a), nothing contained in this
Section 6.8 shall prohibit the Board of Directors, executive officers or
stockholders of VSA, or the investment bankers, attorneys, or other advisors or
representatives retained by VSA from participating in any discussions or
negotiations with, or furnishing any information to, any third party that makes
a Takeover Proposal if all of the following events shall have occurred: (i) EAI
has been notified in writing of such Takeover Proposal within 24 hours of VSA's
receipt thereof, including the identity of the party making the Takeover
Proposal and the specific terms and conditions thereof, and has been given
copies of such Takeover Proposal; (ii) such third party has made a written
Takeover Proposal to the Board of Directors of VSA, which Takeover Proposal
identifies a price or range of values to be paid and based on the advice of
VSA's investment bankers, the Board of Directors of VSA has determined that such
Takeover Proposal is financially more favorable to the stockholders of VSA than
the terms of the Merger; (iii) VSA's Board of Directors has determined, based on
the advice of VSA's investment bankers, that such third party is financially
capable of consummating the transactions specified in the Takeover Proposal; and
(iv) the Board of Directors of VSA has determined, after consultation with its
outside legal counsel, that its fiduciary duties require it to furnish
information to and negotiate with such third party. Notwithstanding the
foregoing, VSA shall not provide any non-public information to such third party
unless (x) prior to the date thereof VSA has provided such information to EAI;
(y) VSA has notified EAI in advance of any such proposed disclosure of
non-public information and has provided EAI with a description of the
information VSA intends to disclose; and (z) VSA provides such non-public
information pursuant to a nondisclosure agreement in a form satisfactory to EAI.
(c) In addition to the foregoing requirements, VSA shall not accept or
enter into any agreement concerning a Takeover Proposal until at least 48 hours
after EAI's receipt of a copy of such Takeover Proposal. Upon compliance with
the requirements in the foregoing paragraph (b) and this paragraph (c), VSA
shall be entitled to terminate this Agreement in accordance with the provisions
of Section 8.1(d).
(d) For purposes of this Agreement, "Takeover Proposal" means any proposal
or offer for a merger, consolidation or other business combination involving VSA
or any proposal or offer to acquire a material equity interest in, or a
substantial portion of the assets of, VSA other than by EAI as contemplated by
this Agreement.
(e) VSA shall be entitled to furnish a copy of this Section 6.8 to any
third party who expresses an interest in making a Takeover Proposal after the
execution of this Agreement.
6.9. Tax Matters. VSA and EAI agree as follows:
(a) VSA and EAI will not, and VSA and EAI will use its best efforts to
cause its stockholders not to file any tax return, make any disclosure or
otherwise take any position or any action that is inconsistent with the Merger
qualifying as a reorganization under Section 368(a)(1)(A) of the Code or would
alone or in conjunction with any other action cause the Merger to not qualify as
a reorganization under Section 368(a)(1)(A) of the Code. VSA and EAI will, and
VSA will use its best efforts to cause its stockholders to, file all Returns and
take such other actions as may be required for the Merger to qualify as a
reorganization
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under Section 368(a)(1)(A) of the Code and to comply with the regulations under
Section 368 of the Code as they apply to the Merger.
(b) EAI will use its reasonable best efforts to cause the historic business
of VSA to be continued or will use its reasonable best efforts to cause a
significant portion of the historic business assets of VSA to be used in a trade
or business, in a manner sufficient to comply with the continuity of business
enterprise requirements set forth in Treasury Regulation 1.368-1(d) under
Section 368 of the Code.
6.10. ESOP Committee. The Company shall use its reasonable best efforts to
cause Committee that administers the ESOP to take all necessary steps to comply
with the provisions of Section 9.6 of the ESOP concerning the exercise of
stockholder rights by ESOP participants and the ESOP Trustee, and to perfect any
dissenters rights pursuant to the MBCA with respect to any shares of VSA Stock
owned by the ESOP Trustee which are not being exchanged pursuant to Section 2.5.
6.11. Termination of ESOP. As soon as practicable after the Effective
time, the Surviving Corporation shall, at its own expense, cause the termination
of the ESOP in accordance with the Code and ERISA, and the distribution of
participants' interests in the ESOP.
6.12. Tax Matters. VSA will use its best efforts to provide EAI with
information as to the adjusted tax basis of its stockholders in their VSA Stock.
6.13. Intellectual Property Assignment. Effective as of the Effective
Time, VSA and Stockholder shall assign (without the payment of additional
consideration) all of their respective right title and interest in and to all
Intellectual Property to the Surviving Company or its designee in a form
satisfactory to EAI (the "Intellectual Property Assignment").
6.14. Employment Agreement. At the Closing, VSA or EAI shall enter into an
employment agreement with Mark E. Craig substantially in the form attached
hereto as Exhibit B (the "Employment Agreement").
6.15. Form 8-K. EAI shall use its reasonable best efforts to file a
current report on Form 8-K with the SEC with respect to the combined financial
results of EAI and VSA for the thirty-day period following Closing, which filing
shall be effected as soon as reasonably practicable following the end of such
thirty-day period.
6.16. Indemnification. EAI and VSA shall, from and after the Effective
Time, indemnify, defend and hold harmless each person who is now or has been at
any time prior to the date hereof or who becomes prior to the Effective Time, an
officer or director of VSA or any subsidiary of VSA (the "VSA Indemnified
Parties") against all losses, claims, damages, costs, expenses (including
attorneys' fees and expenses), liabilities or judgments or amounts that are paid
in settlement of, with the approval of the indemnifying party (which approval
shall not be unreasonably withheld) or otherwise in connection with any
threatened or actual claim, action, suit, proceeding or investigation based on
or arising out of the fact that such person is or was a director or officer of
VSA or any subsidiary of VSA at or prior to the Effective Time, whether asserted
or claimed prior to or at or after the Effective Time ("VSA Indemnified
Liabilities"), including all VSA Indemnified Liabilities based on, or arising
out of, or pertaining to this Agreement or the transactions contemplated hereby,
in each case to the full extent a corporation is permitted under applicable law
to indemnify its own directors or officers, as the case may be (and EAI and VSA
will pay expenses in advance of the final disposition of any such action or
proceeding to each VSA Indemnified Party to the full extent permitted by law).
The provisions of this Section are intended to be for the benefit of, and shall
be enforceable by, each Indemnified Party, his or her heirs and his or her
personal representatives and shall be binding on all successors and assigns of
EAI and VSA.
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ARTICLE VII.
CONDITIONS PRECEDENT
7.1. Conditions to Each Party's Obligation To Effect the Merger. The
respective obligation of each party to effect the Merger shall be subject to the
satisfaction at or prior to the Effective Time of the following conditions:
(a) APPROVALS AND CONSENTS. All regulatory approvals required to
consummate the transactions contemplated hereby shall have been obtained and
shall remain in full force and effect and all statutory waiting periods in
respect thereof shall have expired (all such approvals and the expiration of all
such waiting periods being referred to herein as the "Requisite Regulatory
Approvals").
(b) S-4. The S-4 shall have become effective under the Securities Act, and
no stop order suspending the effectiveness of the S-4 shall have been issued and
no proceeding for that purpose shall have been initiated or threatened by the
SEC.
(c) NNM LISTING. The shares of EAI Common Stock which shall be issued to
the stockholders of VSA upon consummation of the Merger shall have been
authorized for listing on the NNM, subject to official notice of issuance.
(d) NO INJUNCTIONS OR RESTRAINTS; ILLEGALITY. No order, injunction or
decree issued by any Governmental Authority or other legal restraint or
prohibition preventing the consummation of the Merger or any of the other
transactions contemplated by this Agreement shall be in effect. No law, statute,
rule, regulation, order, injunction or decree shall have been enacted, entered,
promulgated or enforced by any Governmental Authority which prohibits,
materially restricts or makes illegal the consummation of the Merger or the
other transactions contemplated by this Agreement.
(e) VSA STOCKHOLDER APPROVAL. This Agreement and the transactions
contemplated hereby shall have been approved by the requisite holders of the
issued and outstanding shares of VSA Stock.
7.2. Conditions to Obligations of EAI and Sub. The obligation of EAI and
Sub to effect the Merger is also subject to the satisfaction or waiver by EAI at
or prior to the Effective Time of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of
VSA set forth in this Agreement that are qualified with reference to a Material
Adverse Effect shall be true and correct, and the representations and warranties
of VSA that are not so qualified shall be true and correct, except where the
failure to be true and correct would not have a Material Adverse Effect on VSA,
in each case as of the date of this Agreement and (except to the extent such
representations and warranties speak as of an earlier date) as of the Closing
Date as though made on and as of the Closing Date. EAI shall have received a
certificate signed on behalf of VSA by the Chief Executive Officer or President,
to the foregoing effect.
(b) PERFORMANCE OF OBLIGATIONS OF VSA. VSA shall have performed in all
material respects all obligations required to be performed by it under this
Agreement at or prior to the Closing Date, except to the extent that the failure
to so perform would not have a Material Adverse Effect on VSA, and EAI shall
have received a certificate signed on behalf of VSA by the Chief Executive
Officer and President to such effect.
(c) DISSENTERS RIGHTS. Holders of not more than ten percent (10%) of the
outstanding VSA Stock shall have validly exercised their "dissenters rights"
pursuant to the MBCA.
(d) AFFILIATES AGREEMENTS. EAI shall have received executed Affiliate
Letters from each stockholder of VSA listed in Section 6.5 of the Disclosure
Schedule as an "affiliate" of VSA.
(e) PROPRIETARY INFORMATION AGREEMENTS. VSA shall have in its personnel
files an executed copy of VSA's proprietary information agreement (substantially
in the form included in the Disclosure Schedule) from each employee of VSA.
(f) EMPLOYMENT AGREEMENT. Mark E. Craig shall have executed and delivered
to EAI an employment agreement substantially in the form attached as Exhibit B.
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(g) LEGAL OPINION; CLOSING CERTIFICATES. EAI shall have received from
legal counsel to VSA an opinion substantially in the form attached as Exhibit C,
together with such customary closing documents and certificates as EAI or its
counsel shall reasonably request.
(h) ESOP OPINION. EAI shall have received from legal counsel to the ESOP
an Opinion substantially in the form attached hereto as Exhibit D.
(i) INTELLECTUAL PROPERTY ASSIGNMENT. EAI shall have received the executed
Intellectual Property Assignment.
(j) MATERIAL ADVERSE CHANGE. There shall not have occurred any change
which would constitute a Material Adverse Effect on VSA and its subsidiaries,
taken as a whole.
(k) REPAYMENT OF INDEBTEDNESS. VSA shall have received payment in full of
all amounts owed to it by Mark E. Craig or any entity controlled by him or any
of his immediate family members.
7.3. Conditions to Obligations of VSA. The obligation of VSA to effect the
Merger is also subject to the satisfaction or waiver by VSA at or prior to the
Effective Time of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of
EAI set forth in this Agreement that are qualified with a reference to Material
Adverse Effect shall be true and correct, and the representations and warranties
of EAI that are not so qualified shall be true and correct, except where the
failure to be true and correct would not have a Material Adverse Effect on EAI,
in each case, as of the date of this Agreement and (except to the extent such
representations and warranties speak as of an earlier date) as of the Closing
Date as though made on and as of the Closing Date. VSA shall have received a
certificate signed on behalf of EAI by the Chief Executive Officer or the Chief
Financial Officer of EAI to the foregoing effect.
(b) PERFORMANCE OF OBLIGATIONS OF EAI. EAI shall have performed in all
material respects all obligations required to be performed by it under this
Agreement at or prior to the Closing Date, except to the extent that the failure
to so perform would not have a Material Adverse Effect on EAI, and VSA shall
have received a certificate signed on behalf of EAI by the Chief Executive
Officer or the Chief Financial Officer of EAI to such effect.
(c) LEGAL OPINION; CLOSING CERTIFICATES. VSA shall have received from
Jamie A. Wade, General Counsel of EAI, an opinion substantially in the form
attached as Exhibit E together with such customary closing documents and
certificates as VSA or its counsel shall reasonably request.
(d) RELEASE OF GUARANTEE. Mark E. Craig shall have received (i) a release
of all guarantees by him of any obligations of VSA, and (ii) payment in full of
all amounts owed to him by VSA other than salary payable in the ordinary course
of business on regular payroll dates.
(e) EMPLOYMENT AGREEMENT. VSA or EAI shall have executed and delivered to
Mark E. Craig the Employment Agreement.
(f) MATERIAL ADVERSE CHANGE. There shall not have occurred any change
which would constitute a Material Adverse Effect on EAI and its subsidiaries,
taken as a whole.
ARTICLE VIII.
TERMINATION AND AMENDMENT TERMINATION AND AMENDMENT 1
8.1. Termination. This Agreement may be terminated at any time prior to
the Effective Time, whether before or after approval of the Merger by the
stockholders of VSA:
(a) by mutual consent of VSA and EAI in a written instrument, if the Board
of Directors of each so determines by a vote of a majority of the members of its
entire Board;
(b) by either the Board of Directors of VSA or the Board of Directors of
EAI if any Governmental Authority which must grant a Requisite Regulatory
Approval has denied approval of the Merger and such
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denial has become final and non-appealable, or any Governmental Authority of
competent jurisdiction shall have issued an order permanently enjoining or
otherwise prohibiting the consummation of the transactions contemplated by this
Agreement and such order has become final and non-appealable;
(c) by either the Board of Directors of VSA or the Board of Directors of
EAI (provided that the terminating party is not then in material breach of any
representation, warranty, covenant or other agreement contained herein) if (x)
there shall have been a breach of any of the representations or warranties or
any of the covenants or agreements set forth in this Agreement on the part of
the other party which has resulted in a Material Adverse Effect on such other
party, which breach is not cured within 60 days following written notice to the
party committing such breach, (y) the Closing shall not have occurred on or
before November 30, 1998; provided, however, that neither Board of Directors
shall be entitled to terminate the Agreement pursuant to this clause (y) if the
reason the Closing has not occurred by such date is because any Governmental
Authority which must grant a Requisite Regulatory Approval has failed to act,
the VSA stockholder meeting shall not have occurred in accordance with the
requirements of the MBCA or some similar event beyond the control of both
parties shall not have occurred by such date, or (z) the Closing shall not have
occurred on or before December 31, 1998; or
(d) by the Board of Directors of VSA (after consulting with its legal
counsel), if such action is required for the Board of Directors to comply with
its fiduciary duties to VSA and its stockholders as contemplated in Section 6.8
hereof; provided, however, if such action is taken by VSA, then (i) within 2
days of such termination VSA shall reimburse EAI for its out-of-pocket expenses
(in an amount not to exceed $100,000) incurred in connection with the
transactions contemplated by this Agreement; and (ii) if VSA shall consummate
any transaction pursuant to a Takeover Proposal (x) within 12 months following
the date of this Agreement, or (y) pursuant to a definitive agreement executed
by VSA during such 12-month period, VSA shall also promptly pay to EAI
$1,300,000 upon the occurrence of such transaction; provided, however, if the
VSA stockholder meeting shall have occurred and the VSA stockholders shall have
voted with respect to approval of the Merger and the requisite vote necessary to
approve the Merger shall not have been received, then this Agreement shall
automatically be terminated as of the date of such VSA stockholder meeting
without further action of any of the parties hereto and within 2 days of such
termination VSA pay to EAI $1,300,000 and shall reimburse EAI for its
out-of-pocket expenses (in an amount not to exceed $100,000) incurred in
connection with the transactions contemplated by this Agreement.
8.2. Effect of Termination. In the event of termination of this Agreement
by either VSA or EAI as provided in Section 8.1, this Agreement shall forthwith
become void and have no effect, and none of VSA or EAI or any of their directors
or officers shall have any liability of any nature whatsoever hereunder, or in
connection with the transactions contemplated hereby, except that (i) Sections
8.1(d) and 9.1, the final proviso clause of Section 8.1 and this Section 8.2
shall survive any termination of this Agreement, and (ii) notwithstanding
anything to the contrary contained in this Agreement, neither VSA nor EAI shall
be relieved or released from any liabilities or damages arising out of its
willful breach of any provision of this Agreement.
8.3. Amendment; Extension; Waiver. At any time prior to the Effective
Time, the parties hereto, by action taken or authorized by their respective
Board of Directors, may, to the extent legally allowed, (i) amend any term or
provision of this Agreement, (ii) extend the time for the performance of any of
the obligations or other acts of the parties hereto, (iii) waive any
inaccuracies in the representations and warranties contained herein or in any
document delivered pursuant hereto and (iv) waive compliance with any of the
agreements or conditions contained herein; provided, however, that after any
approval of the transactions contemplated by this Agreement by the stockholders
of VSA, there may not be, without further approval of such stockholders, any
amendment, extension or waiver of this Agreement which reduces the amount or
changes the form of the consideration to be delivered to the holders of VSA
Stock hereunder other than as contemplated by this Agreement. Any agreement on
the part of a party hereto to any such amendment, extension or waiver shall be
valid only if set forth in a written instrument signed on behalf of such party,
but such amendment, extension or waiver or failure to insist on strict
compliance with any obligation,
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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
covenant, agreement or condition in this Agreement shall not operate as a waiver
of, or estoppel with respect to, any subsequent or other failure.
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ARTICLE IX.
INDEMNIFICATION
9.1. Indemnification by Stockholder. Subject to Section 9.6 hereof, Mark
E. Craig (the "Stockholder") shall indemnify EAI, and its affiliates (including
after the Closing, the Surviving Corporation), and their respective
stockholders, officers, directors, employees and agents, from and against, and
will pay them the amount of, any and all losses, costs, claims, liabilities,
damages (including incidental and consequential damages), penalties and expenses
(including attorneys' and auditor fees and the costs of investigation and
defense) (collectively, the "Losses"), incurred or suffered by EAI or its
affiliates relating to or arising out of or in connection with any of the
following:
(a) any breach of or any inaccuracy in any representation or warranty made
by VSA as of the date hereof or as the Closing Date in respect to Sections 3.2,
3.7, 3.9, 3.10, 3.11, 3.12 or 3.19 or any matter disclosed on the portion of the
Disclosure Schedule pertaining to such Sections; or
(b) any breach of or failure by VSA to perform any of its covenants or
obligations set out or contemplated in this Agreement or any document delivered
at or in connection with the Closing.
9.2. Claims. As soon as is reasonably practicable after becoming aware of
a claim for indemnification under this Agreement, EAI shall promptly give notice
to the indemnifying person ("Indemnifying Person") of such claim and the amount
EAI will be entitled to receive hereunder from the Indemnifying Person. If the
Indemnifying Person does not object in writing to such indemnification claim
within 30 days of receiving notice thereof, EAI shall be entitled to recover, on
the 31st day after such notice was given, from the Indemnifying Person the
amount of such claim, and no later objection by the Indemnifying Person shall be
permitted; if the Indemnifying Person agrees that he has an indemnification
obligation but objects that he is obligated to pay only a lesser amount, EAI
shall nevertheless be entitled to recover, on the 31st day after such notice was
given, from the Indemnifying Person the lesser amount, without prejudice to
EAI's claim for the difference.
9.3. Notice of Third-Party; Assumption of Defense. EAI shall give notice
as promptly as is reasonably practicable to the Indemnifying Person of the
assertion of any claim, or the commencement of any suit, action or proceeding,
by any Person not a party hereto in respect of which indemnity may be sought
under this Agreement. The Indemnifying Person may, at his own expense, (a)
participate in the defense of any claim, suit, action or proceeding; and (b)
upon notice to EAI and Indemnifying Person's delivering to EAI a written
agreement that EAI is entitled to indemnification for all Losses arising out of
such claim, suit, action or proceeding and that the Indemnifying Person shall be
liable for the entire amount of any Loss, at any time during the course of any
such a claim, suit, action or proceeding, assume the defense thereof; provided,
however, that (i) the Indemnifying Person's counsel is reasonably satisfactory
to EAI, and (ii) the Indemnifying Person shall thereafter consult with EAI upon
EAI's reasonable request for such consultation from time to time with respect to
such claim, suit, action or proceeding. If the Indemnifying Person assumes such
defense, EAI shall have the right (but not the duty) to participate in the
defense thereof and to employ counsel, at its own expense, separate from the
counsel employed by the Indemnifying Person. If, however, EAI reasonably
determines in its judgment that representation by the Indemnifying Person's
counsel of both the Indemnifying Person and EAI would present such counsel with
a conflict of interest, then EAI may employ separate counsel to represent or
defend it in any such claim, action, suit or proceeding and the Indemnifying
Person shall pay the fees and disbursements of such separate counsel. Whether or
not the Indemnifying Person chooses to defend or prosecute any such claim, suit,
action or proceeding, all of the parties hereto shall cooperate in the defense
or prosecution thereof.
9.4. Settlement or Compromise. Any settlement or compromise made or caused
to be made by EAI or the Indemnifying Person, as the case may be, of any claim,
suit, action or proceeding shall also be binding upon the Indemnifying Person or
EAI, as the case may be, in the same manner as if a final judgment or decree
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had been entered by a court of competent jurisdiction in the amount of such
settlement or compromise; provided, however, that no obligation, restriction or
Loss shall be imposed on EAI as a result of such settlement without its prior
written consent. EAI will give the Indemnifying Person at least 30 days' notice
of
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any proposed settlement or compromise of any claim, suit, action or proceeding
it is defending, during which time the Indemnifying Person may reject such
proposed settlement or compromise, provided, however, that from and after such
rejection, the Indemnifying Person shall be obligated to assume the defense of
and full and complete liability and responsibility for such claim, suit, action
or proceeding and any and all Losses in connection therewith in excess of the
amount of unindemnifiable Losses which EAI would have been obligated to pay
under the proposed settlement or compromise.
9.5. Failure of Indemnifying Person to Act. In the event that the
Indemnifying Person does not elect to assume the defense of any claim, suit,
action or proceeding, then any failure of EAI to defend or to participate in the
defense of any such claim, suit, action or proceeding or to cause the same to be
done, shall not relieve the Indemnifying Person of his obligations hereunder.
9.6. Limitations on Stockholders Indemnity. Notwithstanding anything to
the contrary contained in this Agreement:
(a) In order for EAI and its affiliates (including after Closing the
Surviving Corporation), and their respective, stockholders, officers, directors,
employees and agents, to make a claim against Stockholder for indemnification
pursuant to this Article IX, each such indemnifiable claim must exceed a minimum
threshold of $10,000 (a "Covered Claim");
(b) The Stockholder shall not be liable for any Covered Claim under this
Article IX unless and until the aggregate amount of the Covered Claims shall
exceed $300,000, in which event the Stockholder shall only be liable for the
aggregate amount of all Covered Claims in excess of $300,000, subject, however
to the other limitations set forth herein; and
(c) In no event shall the aggregate liability of Stockholder under this
Agreement exceed $3,000,000.
ARTICLE X.
GENERAL PROVISIONS
10.1. Expenses. Except as set forth in Article IX, Section 8.1(e) or the
final proviso clause of Section 8.1, all costs and expenses incurred by EAI or
Sub in connection with this Agreement and the transactions contemplated hereby
shall be by paid EAI, and all costs and expenses incurred by VSA (and/or
Stockholder in connection with this Agreement and the transactions contemplated
hereby shall be paid by VSA.
10.2. Notices. All notices and other required communications hereunder
shall be in writing and shall be deemed given: if delivered personally, when so
delivered; if telecopied, on the date telecopied (provided there is written
confirmation of receipt and a confirming notice or communication is delivered in
the manner set forth herein); if mailed by registered or certified mail (postage
prepaid and return receipt requested), on the date five days after deposit in
the mail; or if delivered by overnight courier (with written confirmation of
delivery to such courier), on the next business after such delivery, in each
case to the parties at the following addresses (or at such other address for a
party as shall be specified by like notice):
(a) if to EAI, to:
Engineering Animation, Inc.
2321 North Loop Drive
Ames, Iowa 50010
Attention: Jamie A. Wade
Vice President of Administration, General Counsel and Secretary
Fax: (515) 296-6941
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VARIATION SYSTEMS ANALYSIS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
with a copy to:
Gardner, Carton & Douglas
321 North Clark Street, Suite 3400
Chicago, Illinois 60610
Attention: Nancy M. Borders
Fax: (312) 644-3381
and
(b) if to VSA or Stockholder, to:
Variation Systems Analysis, Inc.
300 Maple Park Boulevard
St. Clair Shores, MI 48081-3771
Attention: Mark E. Craig
Fax: 810-778-6470
with a copy to:
Timmis & Inman L.L.P.
300 Talon Centre
Detroit, MI 48207
Attention: Henry J. Brennan, Esq.
Fax: (313) 396-4229
10.3. Interpretation. When a reference is made in this Agreement to
Sections, Schedules or Exhibits, such reference shall be to a Section of or
Schedule or Exhibit to this Agreement unless otherwise indicated. The table of
contents and headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement. Whenever the words "include," "includes" or "including" are used in
this Agreement, they shall be deemed to be followed by the words "without
limitation." No provision of this Agreement shall be construed to require EAI,
Sub, VSA or any of their respective affiliates to take any action which would
violate any applicable law, rule or regulation.
10.4. Counterparts; Facsimile. This Agreement may be executed in
counterparts, all of which shall be considered one and the same agreement. The
Agreement may be executed and delivered by facsimile transmission, and a
facsimile of this Agreement or of a signature of a party shall be as effective
as an original.
10.5. Entire Agreement. This Agreement (including the Disclosure Schedule,
Exhibits, documents and instruments referred to herein) constitutes the entire
agreement of the parties and supersedes all prior agreements and understandings,
both written and oral, between the parties with respect to the subject matter
hereof. Disclosure of any matter in the Disclosure Schedule for purposes of any
Section of this Agreement shall constitute disclosure of such matter for
purposes of all Sections within such Article for purposes of this Agreement.
10.6. Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of Michigan, without regard to any
applicable conflicts of law which would result in the application of any other
law.
10.7. Survival. All representations, warranties, covenants and agreements
contained in this Agreement, or in any Schedule, certificate, document or
statement delivered pursuant hereto, shall survive the Closing for a period of
two (2) years, except for the representations and warranties contained in
Section 3.7, which shall expire at the Effective Time.
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VARIATION SYSTEMS ANALYSIS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10.8. Severability. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, the provision shall be interpreted
to be only so broad as is enforceable.
10.9. Publicity. Except as otherwise required by applicable law or the
rules of the NNM, neither VSA nor EAI shall, or shall permit any of their
respective affiliates to, issue or cause the publication of any press release or
other public announcement with respect to, or otherwise make any public
statement concerning, the transactions contemplated by this Agreement without
the prior consent of the other party, which consent shall not be unreasonably
withheld.
10.10. Assignment; Third Party Beneficiaries. Neither this Agreement nor
any of the rights, interests or obligations set forth herein shall be assigned
by either of the parties (whether by operation of law or otherwise) without the
prior written consent of the other party. Subject to the preceding sentence,
this Agreement shall be binding upon, inure to the benefit of, and be
enforceable by, the parties and their respective successors and assigns. This
Agreement (including the Disclosure Schedule, Exhibits, documents and
instruments referred to herein) is not intended to confer upon any person other
than the parties hereto any rights or remedies hereunder, other than in respect
to the parties entitled to indemnification pursuant to Article IX.
10.11. Knowledge and Awareness. As used in this Agreement, "knowledge" or
"awareness" of VSA means the actual knowledge or awareness of Mark E. Craig.
10.12. Construction. The parties have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the parties and no presumptions or burden of proof
shall arise favoring or disfavoring any party by virtue of the authorship of any
of the provisions of this Agreement. Any reference to any Federal, state,
county, local or foreign law or statute shall be deemed also to refer to all
rules and regulations promulgated thereunder, unless the context requires
otherwise.
10.13. Pooling of Interests Accounting; Tax Free Reorganization. In the
event that either EAI or VSA becomes aware of any provisions of this Agreement
which would prevent the Merger from being accounted for as a pooling of
interests or qualifying as a reorganization within the meaning of Section 368 of
the Code, such parties shall negotiate in good faith with a view toward amending
this Agreement in a manner which would permit the Merger to be accounted for as
a pooling of interests or qualified as such a reorganization, as applicable.
[SIGNATURE PAGE FOLLOWS]
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VARIATION SYSTEMS ANALYSIS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
IN WITNESS WHEREOF, EAI, Sub and VSA have caused this AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER to be executed by their respective officers
thereunto duly authorized as of the date first above written.
<TABLE>
<S> <C>
ENGINEERING ANIMATION, INC EAI VICTORY, INC.
By: /s/ JAMIE A. WADE By: /s/ JAMIE A. WADE
Name: Jamie A. Wade Name: Jamie A. Wade
Title: Vice President Title: Vice President
</TABLE>
VARIATION SYSTEMS ANALYSIS, INC.
By: /s/ MARK E. CRAIG
Mark E. Craig
President and Chief Executive
Officer
AGREED TO WITH RESPECT TO
SECTION 6.12 AND ARTICLE IX AS OF
THE DATE FIRST ABOVE WRITTEN
/s/ MARK E. CRAIG
Mark E. Craig, individually as
the Stockholder
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<PAGE> 98
VARIATION SYSTEMS ANALYSIS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
EXHIBIT A
FORM OF AFFILIATE LETTER
, 1998
Engineering Animation, Inc. 2321 North Loop Drive Ames, Iowa 50010
Ladies and Gentlemen:
I have been advised that as of the date of this letter I may be deemed to
be an "affiliate" of Variation Systems Analysis, Inc., a Michigan corporation
("VSA"), as the term "affiliate" is defined within the meaning of Rule 145 of
the rules and regulations (the "Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended (the "Act"). Pursuant to the terms of the Agreement and Plan of Merger
dated as of July 29, 1998 (as may be amended from time to time, the "Agreement")
among Engineering Animation, Inc., a Delaware corporation ("EAI"), EAI Victory,
Inc., a Michigan corporation and a wholly owned subsidiary of EAI ("Sub"), and
VSA, Sub will be merged (the "Merger") with and into VSA and, as the surviving
corporation, VSA will be a wholly owned subsidiary of EAI.
In connection with the Merger, I may be entitled to receive shares of
common stock, par value $0.01 per share, of EAI (the "EAI Common Stock") in
exchange for shares of VSA common stock, par value $1.00 per share (the "VSA
Common Stock").
I represent and warrant to, and covenant with, EAI that in the event I
receive any EAI Common Stock as a result of the Merger:
(a) I shall not make any sale, transfer or other disposition of the
EAI Common Stock in violation of the Act or the Rules and Regulations.
(b) I have carefully read this letter and the Agreement and, to the
extent I felt necessary, I have discussed the requirements of such
documents and other applicable limitations upon my ability to sell,
transfer or otherwise dispose of EAI Common Stock with my counsel or
counsel for VSA.
(c) I further represent to, and covenant with, EAI that I will not,
during the 30 days prior to the Effective Time (as defined in the
Agreement), sell, transfer or otherwise dispose of VSA Common Stock or
shares of the capital stock of EAI that I may hold and, furthermore, that I
will not sell, transfer or otherwise dispose of EAI Common Stock received
by me in the Merger or any other shares of the capital stock of EAI until
after such time as results covering at least 30 days of the combined
operations of VSA and EAI have been published by EAI, in the form of a
quarterly earnings report, an effective registration statement filed with
the Commission, a report filed with the Commission on Form 10-K, 10-Q, or
8-K, or any other public filing or announcement that includes such combined
results of operations, and I understand that EAI may place on the
certificates of EAI Common Stock issued to me a legend to the foregoing
effect.
Execution of this letter is not an admission on my part that I am an
"affiliate" of VSA as described in the first paragraph of this letter, or as a
waiver of any rights I may have to object to any claim that I am such an
affiliate on or after the date of this letter.
Sincerely yours,
Name:
By:
Its:
A-31
VARIATION SYSTEMS ANALYSIS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Accepted this day of
, 1998
ENGINEERING ANIMATION, INC.
By:
Name:
Title:
A-32
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VARIATION SYSTEMS ANALYSIS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
EXHIBIT B
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into as of this day of
, 1998, by and between Mark Craig, a resident of Michigan ("Employee")
and ENGINEERING ANIMATION, INC., a Delaware corporation with its principal
offices in Ames, Iowa ("EAI" or "Company").
RECITALS
A. EAI is in the business of producing 3D visualization software products,
interactive and custom 3D software products, and conducting various other
activities associated therewith (the "Business").
B. EAI desires to employ Employee and Employee desires to be employed by
EAI on the terms and conditions set forth herein.
AGREEMENT
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. EMPLOYMENT TERMS. Subject to the terms and conditions set forth herein,
EAI will employ Employee for a term commencing as of (the "Effective
Date") and ending on the second anniversary of the Effective Date, or such
earlier date as may occur pursuant to the terms of this Agreement (the
"Employment Term"). This Agreement may be extended by mutual agreement of the
parties.
2. EMPLOYMENT DUTIES. During the term of this Agreement, Employee will
serve EAI as President of the VSA subsidiary. Employee's initial duties shall
include shared management responsibilities, including profit and loss
responsibilities, for VSA. Employee shall perform such other duties as assigned
from time to time by the Office of General Manager, Software Division of EAI,
subject to the terms of this Agreement. Employee's base of operations shall be
the Greater Detroit Metropolitan area, defined as including the area inside a
circle with a fifty mile radius from the center of the city. Employee will,
during the term of this Agreement, serve the Company faithfully, diligently and
competently and will perform assigned duties on a full-time basis to the best of
Employee's ability.
3. COMPENSATION. During the term of employment, EAI will pay to Employee
for services rendered by Employee under this Agreement, the following:
(a) From the Effective Date of this Agreement through the second
anniversary of the Effective Date, a salary at a rate of $180,000. per
annum payable in arrears monthly, in accordance with the EAI's ordinary
payroll practices; and
(b) During the period from the Effective Date through December 31, 1998,
Employee shall be entitled to receive such bonus as is earned pursuant
to the bonus plan annexed hereto as Exhibit 1 and incorporated herein by
reference; and
(c) During the last quarter of each fiscal year Employee will participate
in the planning process which results in the establishment of goals and
budgets for the following fiscal year. After the end of each fiscal year
of the Company, beginning fiscal 1999, during the Employment Term,
Employee shall be eligible for an annual performance bonus, the nature
and amount of which shall be determined by and in the discretion of the
Company after reviewing Employee's performance and the Company's results
of operations during and for such fiscal year and such other
considerations deemed appropriate by the Company. Employee shall
participate in any executive stock option bonus program to the same
extent as other executives similarly situated. Notwithstanding anything
else in this Agreement, the declaration and payment and the amount of
any performance bonus to
A-33
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VARIATION SYSTEMS ANALYSIS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Employee shall be in the discretion of the Company and Employee shall
have no absolute right to a performance bonus in any year.
Payments made pursuant to this section while Employee is employed by shall
be treated as wages for withholding and employment tax purposes.
4. INSURANCE. During the Employment Term, the Company shall provide to the
Employee a term life insurance policy in the face amount of $200,000 with the
beneficiary to be named by the Employee. In addition, the Company shall be
entitled to obtain as the beneficiary "key man" or other similar life insurance
on Employee in an amount that the Company shall in its discretion deem
appropriate.
5. CAR ALLOWANCE. Employee shall receive a car allowance of $500 per month
as additional compensation and in lieu of reimbursement for personal auto
mileage expenses. Normal payroll taxes shall apply to this payment.
6. SEVERANCE PROVISIONS. In the event that Employee is terminated for any
reason whatsoever (including death, permanent disability and Change of Control
as defined in the EAI Employee Stock Option Plan and including for good reason
pursuant to paragraph 11), except for cause as defined in paragraph 11, during
the term of this Agreement, then Employee shall receive severance payments equal
to the monthly salary payments and a continuation of benefits to the end of the
Employment Term; in addition thereto, if Employee is terminated for any reason
whatsoever, except for cause as defined in paragraph 11, during the second year
of the Employment Term, Employee shall receive such severance payments so that
Employee shall receive severance payments for a total of twelve (12) months from
termination, in an aggregate amount equal to Employee's annual salary and bonus
in the year prior to termination.
7. BENEFITS.
(a) Employee shall be entitled during the Employment Term to participate
in such employee benefit plans and programs, including, without
limitation, profit sharing, cafeteria, health and life insurance plans,
as are maintained from time to time for employees of EAI to the extent
that his position, tenure, compensation, age, health and other
qualifications make him eligible to participate. The Company does not
promise the adoption or continuance of any particular plan or program
during the employment term and employee's (and his dependents')
participation in any such plan or program shall be subject to the
provisions, rules, regulations and laws applicable from time to time
thereto.
(b) During the Employment Term, Employee shall be entitled to paid time
off, in accordance with the policies of the Company, of twenty-one (21)
days during each year of employment. In addition, Employee shall be
entitled to paid time off on such holidays as are observed by the
Company from time to time. Accrued, unused vacation may be carried over
from one year to the next in accordance with Company policies.
(c) Employment shall be permitted, upon the Effective Date to participate
in the EAI 401(k) savings plan which permits employee contributions of
up to eighteen percent (18%) of total annual compensation and provides
that EAI will match one-half of Employee's contribution up to a total
match amount of two percent (2%) of Employee's total compensation. EAI's
contribution to the Plan vests according to the terms of the Plan.
8. REIMBURSEMENT OF EXPENSES. To the extent consistent with the general
expense reimbursement policies maintained by EAI from time to time, Employee
shall be entitled to reimbursement for ordinary, necessary and reasonable
out-of-pocket trade or business expenses which Employee incurs in connection
with performing his duties under this Agreement, including reasonable travel and
meal expenses. The reimbursement of all such expenses shall be made upon
presentation of evidence reasonably satisfactory to EAI of the amounts and
nature of such expenses and shall be subject to the prior approval of EAI.
9. KEY EMPLOYEE NON-COMPETITION AGREEMENT. Employee agrees to be bound by
the terms of the Key Employee Non-competition Agreement which is attached hereto
as Exhibit A.
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VARIATION SYSTEMS ANALYSIS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. EMPLOYEE PROPRIETARY INFORMATION AGREEMENT. Employee recognizes that
as a result of employment by EAI, he will come into possession of confidential
information and as a condition of employment, agrees to execute and abide by the
terms of the Employee Proprietary Information Agreement attached hereto as
Exhibit B.
11. TERMINATION. This Agreement may be terminated by the Company for cause
which shall be defined as (i) any action by Employee involving willful gross
misconduct having a material adverse effect on the Company; (ii) Employee being
convicted of a felony under the laws of state of the United States or any state
or under the laws of any other country or political subdivision thereof. This
Agreement may be terminated for good reason by Employee under the following
circumstances: (a) Employee's duties are reduced to a non-executive level, (b)
the failure of a successor to the Company to assume the obligations of this
Agreement, (c) breach of this Agreement by the Company.
12. MISCELLANEOUS.
(a) All notices hereunder shall be in writing and shall be deemed given
when delivered in person or when sent by email or telecopier followed by
hard copy; or following three (3) business days after being deposited in
the United States mail, postage prepaid, registered or certified mail,
or two (2) days after delivery to a nationally recognized express
courier, expenses prepaid, addressed as follows:
If to Employee: Addressed to the last address on the payroll records of
EAI.
If to EAI: Engineering Animation, Inc.
2321 North Loop Drive
Ames, IA 50010
Attention: Jamie A. Wade, General Counsel
(b) This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective heirs, successors and permitted
assigns
(c) This Agreement contains all of the agreements between the parties with
respect to the subject matter hereof and this Agreement supersedes all
other agreements, oral or written, between the parties hereto with
respect to the subject matter hereof.
(d) No change or modification of this Agreement shall be valid unless the
same shall be in writing and signed by the parties hereto. No waiver of
any provisions of this Agreement shall be valid unless in writing and
signed by the waiving party.
(e) If any provisions of this Agreement (or portions thereof) shall, for
any reason, be deemed invalid or unenforceable by any court of competent
jurisdiction, such provisions (or portions thereof) shall be ineffective
only to the extent of such invalidity or unenforceability, and the
remaining provisions of this Agreement (or portions thereof) shall
nevertheless be valid, enforceable and of full force and effect. EAI's
rights under this Agreement shall not be exclusive and shall be in
addition to all other rights and remedies available at law or in equity.
(f) This Agreement may be executed in multiple counterparts, each of which
shall be deemed to be an original and all of which, when taken together,
shall constitute a single instrument.
(g) This Agreement shall be governed and controlled as to validity,
enforcement, interpretation, construction, effect and in all other
respects by the laws of the State of Michigan applicable to contracts
made in Iowa (other than any conflict of laws rule which might result in
the application of the laws of any other jurisdiction). Employee hereby
expressly submits and consents in advance to the personal jurisdiction
of the federal and state courts of the State of Michigan for all
purposes in connection with any action or proceeding arising out of or
relating to this Agreement.
A-35
VARIATION SYSTEMS ANALYSIS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first above written.
<TABLE>
<S> <C>
ENGINEERING ANIMATION, INC. EMPLOYEE
By:
Name:
Title:
</TABLE>
A-36
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VARIATION SYSTEMS ANALYSIS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
EXHIBIT C
FORM OF LEGAL OPINION TO BE DELIVERED
BY COUNSEL TO VSA
The legal opinion of Timmis & Inman L.L.P., counsel to Variation Systems
Analysis, Inc. ("VSA"), shall be to the effect that:
1. VSA has been duly incorporated and is validly existing and in good
standing under the laws of the State of Michigan. VSA has the corporate power
and authority to own or lease all of its properties and assets and to carry on
its business as it is now being conducted. Except as set forth on Section
to the Disclosure Schedule, to our knowledge based upon an officer's
certificate of VSA, VSA is duly qualified to do business and is in good standing
as a foreign corporation under the laws of each jurisdiction in which the nature
of the business conducted by it or the character or location of the properties
and assets owned or leased by it makes such qualification necessary, except
where the failure to be so qualified would not have a Material Adverse Effect of
VSA.
2. The authorized capital stock of VSA consists of (a) 100,000 shares of
common stock, $1.00 par value per share ("Common Stock"), of which the stock
records of VSA reflect shares are issued and outstanding. All of the
issued and outstanding shares of Common Stock have been duly authorized and, to
our knowledge, validly issued and are fully paid, nonassessable, free of
statutory preemptive rights. To the knowledge of such counsel VSA, based upon an
officer's certificate of VSA, VSA does not have and is not bound by any
outstanding subscriptions, options, convertible securities, warrants, calls,
commitments or agreements of any character calling for the purchase or issuance
of any shares of its capital stock.
3. VSA has the corporate power and authority to execute and deliver the
Merger Agreement and to consummate the transactions contemplated thereby. The
execution and delivery of the Merger Agreement and the consummation of the
transactions contemplated thereby have been duly and validly approved by the
Board of Directors of VSA. Except for the approval of the shareholders of VSA,
no other corporate proceedings on the part of VSA are necessary to approve the
Merger Agreement or to consummate the transactions contemplated thereby. The
Merger Agreement has been duly and validly executed and delivered by VSA and
constitutes a valid and binding obligation of VSA, enforceable against VSA in
accordance with its terms, subject to the qualifications that enforcement may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium, or
other similar laws affecting creditors' rights generally and by general
principles of equity (regardless of whether enforcement is sought in equity or
in law). No opinion is expressed as to the validity or enforceability of any
provision regarding choice of law to govern the Merger Agreement.
4. Except as disclosed in Section of the Disclosure Schedule, the
execution and delivery of the Merger Agreement by VSA, the consummation by VSA
of the transactions contemplated thereby, and the compliance by VSA with the
terms or provisions thereof, will not (i) violate any provision of the Articles
of Incorporation or By-Laws of VSA, (ii) constitute a violation of any
Applicable Contracts, which would have a Material Adverse Effect on VSA, (iii)
cause the creation of any security interest or lien upon any of the property of
VSA pursuant to any Applicable Contract, which would have a Material Adverse
Effect on VSA, (iv) contravene any provision of any Applicable Law, which would
have a Material Adverse Effect on VSA, or (v) contravene any Applicable Order of
any federal governmental authority known by such counsel to be applicable to
VSA, which would have a Material Adverse Effect on VSA
Reference to (i) "Applicable Laws" shall mean the general corporate laws of
the State of Michigan, and those laws, rules and regulations of the State of
Michigan and the United States of America which, to such counsel's knowledge,
are applicable to transactions of the type contemplated by the Merger Agreement;
(ii) "Governmental Authorities" shall mean any Michigan or federal executive,
legislative, judicial, administrative or regulatory body, or any regulatory body
acting pursuant to the Michigan Business Corporation Act; (iii) "Applicable
Orders" shall mean those orders or decrees of Governmental Authorities
identified on a schedule attached to such opinion which are the only orders or
decrees known to such counsel to be binding on
A-37
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VARIATION SYSTEMS ANALYSIS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
VSA; and (iv) "Applicable Contracts" shall mean those agreements or instruments
set forth on Section 3.14 of the Disclosure Schedule to the Merger Agreement.
7. Except for (i) the filing of Certificate of Merger with the Michigan
Secretary pursuant to the Michigan Business Corporation Act, (ii) the approval
of the Merger Agreement by the requisite vote of the holders of VSA Stock, and
(iii) the filings and authorizations necessary to list the shares of EAI Common
Stock received pursuant to the Merger Agreement on the NNM, no Consent of any
Governmental Authority is necessary in connection with the execution and
delivery by VSA of the Merger Agreement and the consummation by VSA of the
Merger and the other transactions contemplated thereby, which if not obtained
would have a Material Adverse Effect on VSA.
8. To our knowledge based upon an officer's certificate of VSA, there are
no actions, suits or proceedings pending or threatened against VSA at law or in
equity or before any Governmental Authority or challenging the validity or
propriety of the transactions contemplated by the Merger Agreement, which would
have a Material Adverse Effect on VSA.
A-38
<PAGE> 104
VARIATION SYSTEMS ANALYSIS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
EXHIBIT D
FORM OF OPINION
REGARDING VARIATION SYSTEMS ANALYSIS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST
(THE "ESOP" AND THE "TRUST," RESPECTIVELY)
The opinion of counsel to the ESOP and the Trust, given pursuant to Section
7.2(k) of the Agreement and Plan of Merger (the "Merger Agreement"), shall be
satisfactory in form and substance to EAI and shall be to the effect that:
1. The ESOP and the Trust adopted by Variation Systems Analysis, Inc. (the
"Corporation") have been duly authorized, executed and delivered on behalf of
the Corporation.
2. The Trust is exempt from tax under Section 501(a) of the Internal
Revenue Code of 1986 (the "Code") and forms a part of a stock bonus plan (the
"ESOP") which meets all applicable requirements for qualification under Section
401(a) of the Code and which satisfies the requirements for "employee stock
ownership plans" under Section 4975(e)(7) of the Code.
3. The Corporation has taken all necessary action to appoint Comerica Bank
as the Trustee of the Trust. The Trust is a trust duly formed in accordance with
its trust agreement and Michigan law, and is validly existing under the laws of
the state of Michigan.
4. Immediately prior to the commencement of the transactions contemplated
by the Merger Agreement, the Trustee of the Trust was the sole registered owner
of 6243.78 shares of the Corporation's Common Stock ("Shares"), not in its
individual capacity, but solely as Trustee of the ESOP. Assuming EAI is
acquiring the Shares for value, in good faith and without notice of any adverse
claim, then EAI, upon registration of the Shares in its name in the stock
records of the Corporation, will acquire all the rights of the Trustees in the
Shares, free and clear of any adverse claim.
5. The delivery and exchange by the Trustee of the Shares for stock of EAI
are within the Trustee's powers under Article IX of the ESOP, have been duly
authorized by all necessary Trustee action, and do not contravene (i) Article IX
(or any other provision) of the ESOP, or (ii) applicable law (including without
limitation ERISA, the regulations issued thereunder, the Code and the
regulations issued thereunder), and specifically including, without limitation,
that the Trustee's actions have been taken solely in the interest of the ESOP's
participants and beneficiaries, after thorough review of the relevant facts and
circumstances and in consultation with independent valuation and legal advisers.
6. The Trustee has taken all actions required by Section 9.01 of the ESOP
with respect to the pass-through to ESOP participants of the decision to
exchange Shares.
7. No further consent or approval from or notice to or filing with any
Governmental Authority is required in connection with the performance of the
obligations of the ESOP Trustee contemplated by the Agreement.
8. All documents and instruments necessary to effect the exchange of the
Shares pursuant to the Merger Agreement have been duly authorized, executed, and
delivered on behalf of the Trustee and constitutes the final, valid and binding
obligation of the Trustee enforceable against it in accordance with their terms,
except as the enforceability thereof may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting the
enforcement of creditors' rights, equitable principles of general applicability
(regardless of whether such enforceability is considered in a proceeding in
equity or at law), and except as may be affected by applicable state and federal
securities and Blue Sky laws and regulations and ERISA.
9. No "prohibited transaction" under ERISA or the Code has occurred with
respect to the ESOP, nor does the exchange of Shares or any other transaction
contemplated by the Merger Agreement constitute such a prohibited transaction.
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VARIATION SYSTEMS ANALYSIS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. Neither the nature of the ESOP and the Trust, nor any of their
businesses or properties, nor any relationship between the ESOP and the Trust
and any other person, nor any circumstance in connection with the sale of Shares
or any other transaction contemplated by the Agreement is such as to require
under ERISA or the Code any authorization, consent, approval, exemption or any
action by or notice to or filing with any court or administrative or
governmental body in connection with any such transaction.
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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
EXHIBIT E
FORM OF LEGAL OPINION TO BE DELIVERED
BY GENERAL COUNSEL OF ENGINEERING ANIMATION, INC.
The legal opinion of Jamie A. Wade, General Counsel of Engineering
Animation, Inc. ("EAI"), shall be to the effect that:
1. EAI is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware. EAI has the corporate power
and authority to own or lease all of its properties and assets and to carry on
its business as it is now being conducted.
2. The authorized capital stock of EAI consists of 60,000,000 shares of EAI
Common Stock and 20,000,000 shares of preferred stock, par value $.01 per share.
All of the issued and outstanding shares of EAI Common Stock have been duly
authorized and validly issued and are fully paid, nonassessable and free of
statutory preemptive rights. The shares of EAI Common Stock to be issued
pursuant to the Merger have been duly authorized and, at the Effective Time upon
issuance pursuant to the Merger Agreement, all such shares will be validly
issued, fully paid, nonassessable and free of statutory preemptive rights.
3. EAI has the corporate power and authority to execute and deliver the
Merger Agreement and the Employment Agreement for Mark Craig (the "Employment
Agreement") and to consummate the transactions contemplated thereby. The
execution and delivery of the Merger Agreement and the Employment Agreement and
the consummation of the transactions contemplated thereby have been duly and
validly approved by the Board of Directors of EAI. No other corporate
proceedings on the part of EAI are necessary to approve the Merger Agreement and
the Employment Agreement or to consummate the transactions contemplated thereby.
The Merger Agreement and the Employment Agreement have been duly and validly
executed and delivered by EAI and constitute valid and binding obligations of
EAI, enforceable against EAI in accordance with their terms, except to the
extent that enforcement may be limited by applicable bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium or similar laws of general
application relating to or affecting the enforcement of the rights of creditors
or by equitable principles regardless of whether enforcement is sought in a
proceeding in equity or at law. No opinion is expressed as to the validity or
enforceability of any provision regarding choice of Delaware law to govern the
Merger Agreement and the Employment Agreement.
4. The execution and delivery of the Merger Agreement and the Employment
Agreement by EAI, the consummation by EAI of the transactions contemplated
thereby, and the compliance by EAI with the terms or provisions thereof, will
not (i) violate any provision of the Certificate of Incorporation or By-Laws of
EAI, (ii) violate the Delaware General Corporation Law, or any federal law, rule
or regulation that to the knowledge of such counsel is applicable to
transactions of the type contemplated by the Merger Agreement and the Employment
Agreement, (iii) contravene any order or decree of any federal, governmental
authority known by such counsel to be applicable to EAI, or (iv) constitute a
violation of, or cause the creation of any lien pursuant to, any material
license, lease, contract, agreement or other instrument or obligation to which
EAI or any of its subsidiaries is a party. Notwithstanding the preceding
sentence, no opinion is expressed as to whether the execution and delivery of
the Merger Agreement and the Employment Agreement by EAI, the consummation by
EAI of the transactions contemplated thereby or the compliance by EAI with the
terms and provisions thereof will constitute a breach of, or constitute a
default under, any covenant or provision with respect to financial ratios or
tests or any aspect of the financial condition or results of operations of EAI
contained in any agreement to which EAI is a party.
5. Except for (i) the filing of Certificate of Merger with the Michigan
Secretary pursuant to the Michigan Business Corporation Act and (ii) the filings
and authorizations necessary to list the shares of EAI Common Stock issued
pursuant to the Merger Agreement on the NNM, all of which filings, expirations,
approvals and declarations have been made, occurred or obtained, no Consents
from any federal or Delaware governmental authority are necessary in connection
with the execution and delivery by EAI of the Merger
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VARIATION SYSTEMS ANALYSIS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Agreement and the consummation by EAI of the Merger and the other transactions
contemplated by the Merger Agreement.
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VARIATION SYSTEMS ANALYSIS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
EXHIBIT F
FORM OF AMENDED AND
RESTATED ARTICLES OF INCORPORATION
Pursuant to the provisions of Act 284, Public Acts of 1972, the undersigned
corporation executes the following Articles:
1. The present name of the corporation is: Variation Systems Analysis, Inc.
2. The identification number assigned by the Bureau is: 215535
3. All former names of the corporation are: Applied Computer Solutions, Inc.
4. The date of filing the original Articles of Incorporation was: February 11,
1982
The following Amended and Restated Articles of Incorporation supersede the
Articles of Incorporation for the corporation in their entirety:
ARTICLE I The name of the corporation is: Variation Systems Analysis, Inc.
ARTICLE II The purpose or purposes for which the corporation is formed are: to
engage in any activity within the purposes for which a corporation may be formed
under the Business Corporation Act of Michigan.
ARTICLE III The total authorized shares of stock of the corporation consists of
100,000 shares of common stock and no shares of preferred stock.
A statement of all or any of the relative rights, preferences and limitations of
the shares of each class is as follows: The common stock of the corporation
shall consist of a single class, having equal rights, privileges and powers.
ARTICLE IV
1. The address of the current registered office is: 300 Maple Park Boulevard,
Suite 301, St. Clair Shores, Michigan 48080
2. The name of the current resident agent is: Mark E. Craig
ARTICLE V Any action required or permitted by the Act to be taken at an annual
or special meeting of shareholders may be taken without a meeting, without prior
notice, and without a vote, if consents in writing, setting forth the action so
taken, are signed by the holders of outstanding shares having not less than the
minimum number of votes that would be necessary to authorize or take the action
at a meeting at which all shares entitled to vote on the action were present and
voted. The written consents shall bear the date of signature of each shareholder
who signs the consent. No written consents shall be effective to take the
corporation action referred to unless, within 60 days after the record date for
determining shareholders entitled to express consent to or to dissent from a
proposal without a meeting, written consents dated not more than 10 days before
the record date and signed by a sufficient number of shareholders to take the
action are delivered to the corporation. Delivery shall be to the corporation's
registered office, its principal place of business, or an officer or agent of
the corporation having custody of the minutes of the proceedings of its
shareholders. Delivery made to a corporation's registered office shall be by
hand or by certified or registered mail, return receipt requested.
Prompt notice of the taking of the corporate action without a meeting by
less than unanimous written consent shall be given to shareholders who would
have been entitled to notice of the shareholder meeting if the action had been
taken at a meeting and who have not consented in writing.
ARTICLE VI Shareholders of the corporation shall not be entitled to preemptive
rights.
ARTICLE VII Except as otherwise provided by law, a director of the corporation
is not personally liable to the corporation or its shareholders for monetary
damages for a breach of the directors' fiduciary duty.
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VARIATION SYSTEMS ANALYSIS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
ARTICLE VIII The corporation shall, to the fullest extent now or hereafter
permitted by law, indemnify any director or officer of the corporation (and, to
the extent provided in a resolution of the board of directors or by contract),
may indemnify any employee or agent of the corporation who was or is a party to
or threatened to be made a party to any threatened, pending, or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative and whether formal or informal, including an action by or in the
right of the corporation, by reason of the fact such person is or was a
director, officer, employee, agent or representative of the corporation, or is
or was serving at the request of the corporation as director, officer, partner,
trustee, employee, agent or representative of another foreign or domestic
corporation, partnership, joint venture, trust or other enterprise, whether for
profit or not, against expenses, including attorneys' fees (which expenses may
be paid by the corporation in advance of the final disposition of such action,
suit or proceeding as provided by law), judgments, penalties, fines and amounts
paid in settlement actually and reasonably incurred by such person in connection
with such action, suit or proceeding. The indemnification provided herein shall
continue as to a person who has ceased to be a director or officer of the
corporation and, to the extent provided in a resolution of the board of
directors or in any contract between the corporation and such person, may
continue as to a person who has ceased to be an employee or agent of the
corporation. Any indemnification of a person who was entitled to indemnification
after such person ceased to be a director, officer, employee, agent or
representative of the corporation shall inure to the benefit of the heirs,
executors and administrators of such person. The corporation shall bear the
burden of proving that indemnification is not proper under the circumstances. A
determination by the corporation of the propriety of indemnification shall not
create a presumption or defense that indemnification is not proper under the
circumstances. All directors and officers of any subsidiary of the corporation
shall be deemed to be serving as such at the request of the corporation.
These Amended and Restated Articles of Incorporation were duly adopted on
the day of , 1998 in accordance with the provisions of Section 642
of the Act and were duly adopted by the shareholders. The necessary number of
shares as required by statute were voted in favor of these Amended and Restated
Articles of Incorporation.
Signed this day of
, 1998
By:
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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
EXHIBIT G
AMENDED AND RESTATED BY-LAWS
OF
VARIATION SYSTEMS ANALYSIS, INC.
(ADOPTED AS OF , 1998)
ARTICLE 1.
AMENDMENTS
Section 1.1 AMENDMENT OF THE BY-LAWS. These By-laws may be altered, amended
or repealed, and new By-laws may be adopted by the shareholders or the Board of
Directors, but the by-laws or any specific provision thereof adopted by the
shareholders may not be altered, amended or repealed by the board of directors.
ARTICLE 2.
OFFICES
Section 2.1 REGISTERED OFFICE. The Corporation shall maintain in the State
of Michigan a registered office which may, but need not be, the same as its
place of business, and a registered agent whose business office is identical
with such registered office.
Section 2.2 OTHER OFFICES. The Corporation may also have offices at such
other places both within and without the State of Michigan as the business of
the Corporation may require.
ARTICLE 3.
STOCK
Section 3.1 FORM OF STOCK CERTIFICATES. Stock shall be represented by
certificates.
3.1.1 SIGNING OF CERTIFICATES. Certificates representing stock of the
Corporation shall be signed by the appropriate officers and may be sealed
with the seal or a facsimile of the seal of the Corporation.
3.1.2 IDENTIFICATION OF SHAREHOLDERS. The name and address of each
shareholder, the number and class of stock held and the date on which the
stock was issued shall be entered on the books of the Corporation. The
person in whose name stock stands on the books of the Corporation shall be
deemed the owner thereof for all purposes as regards the Corporation.
Section 3.2 LOST, STOLEN OR DESTROYED CERTIFICATES. If a certificate
representing stock has been lost, stolen or destroyed, the Board of Directors
may in its discretion, except as may be required by law, direct that a new
certificate be issued upon satisfaction of any conditions or requirements it may
impose.
Section 3.3 TRANSFERS OF STOCK. Transfers of stock of the Corporation shall
be recorded on the books of the Corporation.
ARTICLE 4.
SHAREHOLDERS
Section 4.1 ANNUAL MEETING. The annual meeting of the shareholders for the
election of directors and the transaction of any other proper business shall be
held at such date and time within a reasonable period of time after the annual
audit report for the previous fiscal year has become available, as the Board of
Directors shall determine.
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VARIATION SYSTEMS ANALYSIS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Section 4.2 SPECIAL MEETINGS. Special meetings of the shareholders may be
called by the Chairman of the Board or the President, by the Board of Directors
or the holders of not less than one-fifth of all the outstanding stock of the
Corporation entitled to vote on the matter for which the meeting is called.
Section 4.3 PLACE OF MEETING. The Board of Directors may designate any
place as the place of meeting for any annual or special meeting of the
shareholders. In the absence of such designation, the place of meeting shall be
the principal place of business of the Corporation.
Section 4.4 NOTICE OF MEETINGS. For all meetings of shareholders, a written
notice of the meeting shall be delivered to each shareholder of record entitled
to vote at such meeting, which notice shall state the place, date and hour of
meeting. For all special meetings and when and as otherwise required by law, the
notice shall state the purpose or purposes of the meeting. The notice of the
meeting shall be given not less than ten nor more than sixty days before the
date of the meeting. Such notice shall be deemed to have been delivered when
sent by registered mail or by confirmed telex or telecopy, directed to the
shareholder at his or her address as it appears in the records of the
Corporation. When a meeting is adjourned to another time or place, notice need
not be given of the adjourned meeting if the time and place thereof are
announced at the meeting at which the adjournment is taken, unless otherwise
required by law.
Section 4.5 QUORUM. The holders of a majority of the outstanding stock of
the Corporation entitled to vote on a matter, present in person or represented
by proxy, shall constitute a quorum for consideration of such matter at any
meeting of the shareholders unless a greater or lesser number is required by the
Articles of Incorporation. At any adjourned meeting at which a quorum is present
or represented, any business may be transacted which might have been transacted
at the original meeting, unless otherwise required by law. Withdrawal of
shareholders from any meeting shall not cause failure of a duly constituted
quorum at a meeting, unless otherwise required by law.
Section 4.6 MANNER OF ACTING. The affirmative vote of a majority of the
stock represented at a meeting and entitled to vote on a matter at which a
quorum is present shall be the act of the shareholders, unless the vote of a
greater number or voting by class is required by law or the Articles of
Incorporation.
Section 4.7 FIXING OF RECORD DATE. If no record date is fixed for the
determination of shareholders entitled to notice of or to vote at a meeting of
shareholders, or shareholders entitled to receive payment of a dividend, the
date on which notice of the meeting is mailed or the close of business on the
day before the date on which the resolution of the Board of Directors declaring
such dividend is adopted, as the case may be, shall be the record date for such
determination of shareholders. If a record date is specifically set for the
purpose of determining shareholders entitled to notice of or to vote at any
meeting of shareholders, or shareholders entitled to receive payment of any
dividend, or in order to make a determination of shareholders for any other
proper purpose, the Board of Directors may fix in advance a date as the record
date for any such determination of shareholders, such date in any case to be not
more than 60 days and not less than 10 days immediately preceding such meeting.
When a determination of shareholders entitled to vote at any meeting of
shareholders has been made as provided in this Section, such determination shall
apply to any adjournment thereof.
Section 4.8 PROXIES. A shareholder may appoint a proxy to vote or otherwise
act for him or her by signing an appointment form and delivering it to the
person so appointed. No proxy shall be valid after the expiration of three years
from the date thereof unless otherwise provided in the proxy. An appointment of
a proxy is revocable by the shareholder unless the appointment form states that
it is irrevocable and if, and only so long as, it is coupled with an interest
sufficient in law to support an irrevocable power.
Section 4.9 CONSENT OF SHAREHOLDERS IN LIEU OF MEETING. Any action required
to be taken, or which may be taken, at any annual or special meeting of
shareholders may be taken without a meeting, without prior notice and without a
vote, if a consent in writing, setting forth the action so taken, shall be
signed by the holders of shares of outstanding stock having not less than the
minimum number of votes that would be
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VARIATION SYSTEMS ANALYSIS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted.
Section 4.10 NOTICE TO SHAREHOLDERS NOT CONSENTING. Prompt notice of the
taking of corporate action without a meeting by less than unanimous consent
shall be given in writing to those shareholders who have not
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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
consented in writing. In the event that the action which is consented to is such
as would have required the filing of a certificate under any Section of the
Michigan Business Corporation Act of the State of Michigan if such action had
been voted on by the shareholders at a meeting thereof, the certificate filed
under such other Section shall state, in lieu of any statement required by such
Section concerning any vote of shareholders, that written consent has been given
in accordance with the provisions of said Section and that written notice to
non-consenting shareholders has been given as provided in this By-law.
ARTICLE 5.
DIRECTORS
Section 5.1 GENERAL POWERS. The business and affairs of the Corporation
shall be managed by or under the direction of its Board of Directors.
Section 5.2 NUMBER, TENURE AND RESIGNATION. The number of directors of the
Corporation shall be a minimum of one, and shall initially be one until another
number is fixed by resolution of the shareholders. The number of directors may
be increased or decreased from time to time by amendment to these By-laws,
without further amendment to the By-laws; provided however that no decrease in
the number of directors shall have the effect of shortening the term of any
incumbent director. Each director shall hold office until the last to occur of
the next annual meeting of shareholders or until his successor shall have been
elected and qualified, or until his earlier written resignation or removal in
the manner hereinafter provided. A director may resign at any time by written
notice to the Board, its Chairman, the President or the Secretary. The
resignation is effective on the date it bears, or its designated effective date.
Section 5.3 QUORUM AND MANNER OF ACTING. A majority of the Board of
Directors fixed by the shareholders shall constitute a quorum for the
transaction of business at any meeting of the Board of Directors; provided
however that if less than a majority of the number of directors is present at a
meeting, a majority of the directors present may adjourn the meeting at any time
without further notice unless required by law.
Section 5.4 MANNER OF ACTING. The act of a majority of the directors fixed
by the shareholders under this Article shall be the act of the Board of
Directors, unless the act of a greater number is required by law or these
By-laws.
Section 5.5 VACANCIES. Any vacancy occurring in the Board of Directors and
any directorship to be filled by reason of an increase in the number of
directors may be filled by election at an annual meeting or at a special meeting
of shareholders called for that purpose. The board of directors may appoint a
director to fill a vacancy at any regular or special meeting of the Board of
Directors to hold office until a meeting of shareholders is held. A director
elected by the shareholders to fill a vacancy shall hold office for the balance
of the term for which he or she was elected.
Section 5.6 REMOVAL OF DIRECTORS. One or more of the directors may be
removed, with or without cause, at a meeting of shareholders, by the affirmative
vote of the holders of a majority of the outstanding stock then entitled to vote
at an election of directors. No director shall be removed at a meeting of
shareholders unless the notice of such meeting shall state that a purpose of the
meeting is to vote upon the removal of one or more directors named in the
notice. Only the named director or directors may be removed at such meeting.
Section 5.7 REGULAR MEETINGS. A regular meeting of the Board of Directors
shall be held without other notice than this By-law, immediately after, and, at
the same place as, the annual meeting of shareholders. The Board of Directors
may provide, by resolution, the place, date and hour for the holding of
additional regular meetings of the Board of Directors, without other notice than
such resolution.
Section 5.8 SPECIAL MEETINGS. Special meetings of the Board of Directors
may be called by or at the request of the president or a majority of the
directors.
Section 5.9 NOTICE. Notice of any special meeting shall be given to each
director at least 10 days prior to the meeting by written notice directed to
each director at his or her place of business. Such notice shall be deemed to
have been delivered when sent by registered mail, or by confirmed telex or
telecopy, to each
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VARIATION SYSTEMS ANALYSIS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
director at his or her business address. Neither the business to be transacted
at, nor the purpose of any regular or special meeting of the Board of Directors
need be specified in the notice or waiver of notice of such meeting. The
attendance of a director at any meeting shall constitute a waiver of notice of
such meeting, except where a director attends a meeting for the express purpose
of objecting to the transaction of any business because the meeting is not
lawfully called or convened.
Section 5.10 PRESUMPTION OF ASSENT. A director of the Corporation who is
present at a meeting of the Board of Directors at which action on any corporate
matter is taken shall be conclusively presumed to have assented to the action
taken, unless his or her dissent shall be entered in the minutes of the meeting
or unless he or she shall file his or her written dissent to such action with
the person acting as the Secretary of the meeting before the adjournment
thereof, or shall forward such dissent by registered mail to the Secretary of
the Corporation immediately after the adjournment of the meeting. Such right to
dissent shall not apply to a director who voted in favor of such action.
Section 5.11 COMMITTEES. A majority of the directors by resolution passed
by the number of directors fixed pursuant to this Article may designate one or
more committees and appoint members of the Board to serve on the committee or
committees. Each committee shall have one or more members, who serve at the
pleasure of the Board.
Section 5.12 CONSENT IN LIEU OF MEETING. Any action required by the
Michigan Corporation Act of the State of Michigan to be taken at a meeting of
the Board of Directors or any other action which may be taken at a meeting of
the Board or a committee thereof, may be taken without a meeting if a consent in
writing, setting forth the action so taken, shall be signed by all the directors
entitled to vote with respect to the subject matter thereof, or by all members
of such committee, as the case may be, entitled to vote with respect thereto.
Section 5.13 MEETING BY CONFERENCE TELEPHONE. Members of the Board of
Directors or any committee designated by such Board may participate in and act
at any meeting of the Board or committee by means of conference telephone or
other similar communication equipment by means of which all persons
participating in the meeting can hear each other. Participation in a meeting
pursuant hereto shall constitute presence in person at such meeting.
Section 5.14 COMPENSATION. The Board of Directors, by the affirmative vote
of a majority of the directors then in office, and irrespective of any personal
interest of any of its members, shall have authority to establish reasonable
compensation of all directors for services to the Corporation as directors,
officers or otherwise.
Section 5.15 CHAIRMAN OF THE BOARD. The Board of Directors may, from time
to time, appoint a Chairman, who shall preside at all meetings of the
shareholders and of the Board of Directors.
ARTICLE 6.
OFFICERS
Section 6.1 NUMBER. The officers of the Corporation may be a Chairman,
President, one or more Vice Presidents (if elected), a Secretary, a Treasurer,
one or Assistant Secretaries (if elected), one or more Assistant Treasurers (if
elected), and such other officers as may be elected in accordance with the
provisions of this Article.
Section 6.2 ELECTION AND TERM OF OFFICE. The officers of the Corporation
shall be elected annually by the Board of Directors at the first meeting of the
Board of Directors held after each annual meeting of shareholders. If the
election of officers shall not be held at such meeting, such election shall be
held as soon thereafter as reasonably practicable. Subject to the provisions set
forth in this Article, each officer shall hold office until the last to occur of
the next annual meeting of the Board of Directors or until his successor is duly
elected and has qualified. Election of an officer shall not, of itself, create
contract rights.
Section 6.3 REMOVAL. Any officer elected or appointed by the Board of
Directors may be removed by the Board of Directors whenever in its judgment the
best interests of the Corporation would be served thereby, but such removal
shall be without prejudice to the contract rights, if any, of the person so
removed.
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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Section 6.4 VACANCIES; NEW OFFICES. A vacancy occurring in any office may
be filled and new offices may be created and filled, at any time, by the Board
of Directors.
Section 6.5 PRESIDENT. The President shall be the chief executive officer
of the Corporation. He or she shall be in charge of the day to day business and
affairs of the Corporation, subject to the direction and control of the Board of
Directors. He or she shall have the power to appoint such agents and employees
as in his or her judgment may be necessary or proper for the transaction of the
business of the Corporation. He or she may sign, on behalf of the Corporation,
stock certificates, deeds, mortgages, bonds, contracts, or other instruments
which the Board of Directors has authorized to be executed. He or she may vote
on behalf of the Corporation, by proxy or otherwise, all securities which the
Corporation is entitled to vote, and, in general, shall perform all duties
incident to the office of the chief executive officer and such other duties as
from time to time may be prescribed by the Board of Directors.
Section 6.6 VICE PRESIDENT(S). The Vice President, if one is elected (or in
the event more than one Vice President is elected, each of the Vice Presidents)
shall assist the President in the discharge of his or her duties as the
President may direct, and shall perform such other duties as from time to time
may be assigned to him or her (them) by the President or the Board of Directors.
In the absence of the President, the Vice President, if one is elected (or Vice
Presidents, in the order of their election), shall perform the duties and
exercise the authority of the President.
Section 6.7 THE TREASURER. The Treasurer shall have charge and custody of
and be responsible for all funds and securities of the Corporation; receive and
give receipts for monies due and payable to the Corporation from any source
whatsoever, and deposit all such monies in the name and to the credit of the
Corporation in such depositaries as may be designated by the Board of Directors;
have charge of and be responsible for the maintenance of adequate books of
account for the Corporation; and, in general perform all duties incident to the
office of Treasurer and such other duties not inconsistent with these By-laws as
from time to time may be assigned to him by the President, or the Board of
Directors.
Section 6.8 THE SECRETARY. The Secretary shall keep the minutes of the
shareholders' and the Board of Directors' meetings; see that all notices are
duly given in accordance with the provisions of these By-laws or as required by
law; be custodian of the corporate records and for the seal of the Corporation;
keep a register of the post office address of each shareholder which shall be
furnished to the Secretary by such shareholder; sign with the President, or
other authorized officer, stock certificates of the Corporation, the issuance of
which shall have been authorized by resolution of the Board of Directors, and
any contracts, deeds, mortgages, bonds or other instruments which the Board of
Directors has authorized to be executed, according to the requirements of the
form of the instrument; have general charge of the stock transfer books of the
Corporation; and, in general perform all duties incident to the office of
Secretary and such other duties not inconsistent with these By-laws as from time
to time may be assigned to him by the President or the Board of Directors.
Section 6.9 ASSISTANT TREASURERS AND ASSISTANT SECRETARIES. The Board of
Directors may elect one or more Assistant Treasurers and Assistant Secretaries.
In the absence of the Treasurer or in the event of his inability or refusal to
act, the Assistant Treasurer(s), in the order of their election, shall perform
the duties and exercise the authority of the Treasurer. In the absence of the
Secretary, or in the event of his inability or refusal to act, the Assistant
Secretary(ies), in the order of their election, shall perform the duties and
exercise the authority of the Secretary. The Assistant Treasurer(s) shall
respectively, if required by the Board of Directors, give bonds for the faithful
discharge of their duties in such sums and with such sureties as the Board of
Directors shall determine. The Assistant Treasurer(s) and Assistant
Secretary(ies), in general, shall perform such other duties not inconsistent
with these By-laws as shall be assigned to them by the Treasurer or the
Secretary, respectively, or by the President or the Board of Directors.
Section 6.10 COMPENSATION. The compensation of the officers shall be fixed
from time to time by the Board of Directors. No officers shall be prevented from
receiving such compensation by reason of the fact that he is also a director of
the Corporation. All compensation shall be reasonable and solely for services
rendered to the Corporation.
A-50
<PAGE> 115
VARIATION SYSTEMS ANALYSIS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
ARTICLE 7.
FISCAL MATTERS
Section 7.1 FISCAL YEAR. The fiscal year of the Corporation shall be fixed
by resolution of the Board of Directors.
Section 7.2 CONTRACTS. The Board of Directors may authorize any officer or
officers, agent or agents, to enter into any contract or execute and deliver any
instrument in the name and on behalf of the Corporation, and such authority may
be general or confined to specific instances.
Section 7.3 LOANS AND INDEBTEDNESS. No loans shall be contracted on behalf
of the Corporation and no evidences of indebtedness shall be issued in its name
unless authorized by a resolution of the Board of Directors. Such authority may
be general or confined to specific instances.
Section 7.4 CHECKS, DRAFTS, ETC. All checks, drafts or other orders for the
payment of money, notes or other evidences of indebtedness issued in the name of
the Corporation, shall be signed by such officer or officers, agent or agents of
the Corporation as the Board of Directors shall from time to time designate.
Section 7.5 DEPOSITS. All funds of the Corporation not otherwise employed
shall be deposited from time to time to the credit of the Corporation in such
banks, trust companies or other depositaries as the Board of Directors may
select.
ARTICLE 8.
GENERAL
Section 8.1 DIVIDENDS AND DISTRIBUTIONS. The Board of Directors, may from
time to time declare or otherwise authorize and the Corporation may pay,
dividends or other distributions on its outstanding stock in the manner and upon
the terms, conditions and limitations provided by law or the Articles of
Incorporation.
Section 8.2 CORPORATE SEAL. The Board of Directors may provide a corporate
seal which shall be in the form of a circle and shall have inscribed thereon the
name of the Corporation and the words "Corporate Seal, Michigan." The seal may
be used by causing it or a facsimile thereof to be impressed or affixed or in
any manner reproduced.
Section 8.3 WAIVER OF NOTICE. Whenever any notice what ever is required to
be given by law, the Articles of Incorporation or under the provisions of these
By-laws, a written waiver thereof, signed by the person or persons entitled to
such notice, whether before or after the time stated therein, shall be deemed
equivalent to the giving of such notice.
Section 8.4 HEADINGS. Article or section headings are inserted herein only
for convenience of reference and shall not be considered in the construction of
any provision hereof.
A-51
<PAGE> 116
VARIATION SYSTEMS ANALYSIS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
PART II.
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
EAI's Certificate of Incorporation and By-laws provide that EAI shall,
subject to certain limitations, indemnify its directors and officers against
expenses (including attorneys' fees, judgments, fines and certain settlements)
actually and reasonably incurred by them in connection with any suit or
proceeding to which they are a party so long as they acted in good faith and in
a manner reasonably believed to be in or not opposed to the best interests of
the corporation, and, with respect to a criminal action or proceeding, so long
as they had no reasonable cause to believe their conduct to have been unlawful.
Section 102 of the Delaware General Corporation Law permits a Delaware
corporation to include in its certificate of incorporation a provision
eliminating or limiting a director's liability to a corporation or its
stockholders for monetary damages for breaches of fiduciary duty. The enabling
statute provides, however, that liability for breaches of the duty of loyalty,
acts or omissions not in good faith or involving intentional misconduct, or
knowing violation of the law, and the unlawful purchase or redemption of stock
or payment of unlawful dividends or the receipt of improper personal benefits
cannot be eliminated or limited in this manner. EAI's Certificate of
Incorporation includes a provision that eliminates, to the fullest extent
permitted, director liability for monetary damages for breaches of fiduciary
duty.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The Exhibits to this registration statement are listed in the Index to
Exhibits.
ITEM 22. UNDERTAKINGS
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X are not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
The undersigned registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is part of this registration statement, by any person or party
who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer
undertakes that such reoffering prospectus will contain the information called
for by the applicable registration form with respect to reofferings by persons
who may be deemed underwriters, in addition to the information called for by the
other Items of the applicable form.
The registrant undertakes that every prospectus (i) that is filed pursuant
to the paragraph immediately preceding, or (ii) that purports to meet the
requirements of section 10(a)(3) of the Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
II-1
<PAGE> 117
VARIATION SYSTEMS ANALYSIS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in the documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-2
<PAGE> 118
VARIATION SYSTEMS ANALYSIS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Ames and
State of Iowa on the 14th day of August, 1998.
ENGINEERING ANIMATION, INC.
(Registrant)
/s/ MATTHEW M. RIZAI
--------------------------------------
Matthew M. Rizai, Chairman, Chief
Executive
Officer, President, Treasurer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENT, that each of the undersigned hereby
constitutes and appoints, jointly and severally, Matthew M. Rizai and Jamie A.
Wade, or either of them (with full power to each of them to act alone), as his
true and lawful attorneys-in-fact and agents, each with full power of
substitution and resubstitution, for him and on his behalf to sign, execute and
file this Registration Statement, any or all amendments (including, without
limitation, post-effective amendments) to this Registration Statement, and any
and all additional registration statements filed pursuant to Rule 462(b) related
to this Registration Statement, and to file the same, with all exhibits thereto
and all documents required to be filed with respect therewith, with the
Securities and Exchange Commission or any regulatory authority, granting unto
such attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in connection therewith and about the premises in order to effectuate the same
as fully to all intents and purposes as he might or could do if personally
present, hereby ratifying and confirming all that such attorneys-in-fact and
agents, or any of them, or his or their substitute or substitutes, may lawfully
do or cause to be done.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities indicated on the 14th day of August, 1998.
<TABLE>
<S> <C>
/s/ MATTHEW M. RIZAI Chairman, Chief Executive Officer,
- ----------------------------------------------------- President, Treasurer and Director
Matthew M. Rizai (Principal Executive Officer)
/s/ MARTIN J. VANDERPLOEG Executive Vice President and Director
- -----------------------------------------------------
Martin J. Vanderploeg
/s/ JEROME M. BEHAR Vice President of Finance and
- ----------------------------------------------------- Chief Financial Officer
Jerome M. Behar (Principal Financial and Accounting Officer)
/s/ JAMIE A. WADE Vice President of Administration,
- ----------------------------------------------------- General Counsel, Secretary and Director
Jamie A. Wade
/s/ MICHAEL CROW Director
- -----------------------------------------------------
Michael Crow
/s/ LAURENCE J. KIRSHBAUM Director
- -----------------------------------------------------
Laurence J. Kirshbaum
</TABLE>
S-1
<PAGE> 119
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S> <C>
2 Amended and Restated Agreement and Plan of Merger Included as Appendix A to the
between the Registrant, EAI Victory, Inc. and Information Statement/
Variation Systems Analysis, Inc., dated as of August Prospectus
5, 1998
4.2 Rights Agreement between the Registrant and First Filed as Exhibit 4.2 to the
Chicago Trust Company of New York, dated as of Registrant's Statement on Form S-1
January 1, 1996 (file 33-80705) and incorporated
herein by reference.
5 Opinion of Gardner, Carton & Douglas
8 Tax Opinion of Ernst & Young LLP
23(a) Consent of Ernst & Young LLP
23(b) Consent of Ernst & Young LLP
23(c) Consent of Arthur Andersen LLP
23(d) Consent of PricewaterhouseCoopers LLP
23(e) Consent of Gardner, Carton & Douglas (included in
Exhibit 5)
</TABLE>
<PAGE> 1
EXHIBIT 5
[GC&D LETTERHEAD]
August 14, 1998
Securities and Exchange Commission
400 Fifth Street, N.W.
Washington, D.C. 20549
Re: Registration Statement on Form S-4
Ladies and Gentlemen:
We have acted as special securities counsel to Engineering Animation,
Inc., a Delaware corporation (the "Company"), in connection with the legal
proceedings and matters relating to the Company's common stock, par value $0.01
per share (the "Shares"), being registered pursuant to the Registration
Statement on Form S-4 to which this opinion is an Exhibit.
In our opinion, the Shares have been duly authorized and when issued
pursuant to the Amended and Restated Agreement and Plan of Merger among the
Company, EAI Victory, Inc. and Variation Systems Analysis, Inc., dated as of
August 5, 1998, will be validly issued, fully paid and nonassessable.
We consent to the reference to our firm under the caption "Legal
Matters" in the Registration Statement and to the filing of this opinion as an
exhibit to the Registration Statement.
Very truly yours,
Gardner, Carton & Douglas
<PAGE> 1
EXHIBIT 8
[Letterhead of Ernst & Young LLP]
August 13, 1998
The Board of Directors and Shareholders The Board of Directors
Variation Systems Analysis, Inc. Engineering Animation, Inc.
300 Maple Park Boulevard 2321 North Loop Drive
St. Clair Shores, MI 48081-3771 Ames, IA 50010
Re: Acquisition of Variation Systems Analysis, Inc. by Engineering
Animation, Inc.
Dear Ladies and Gentlemen:
This letter is in reply to your request for our opinion concerning certain
Federal income tax consequences of the proposed merger (the "Merger") of EAI
Victory, Inc. ("Sub"), a wholly owned subsidiary of Engineering Animation, Inc.
("EAI") with and into Variation Systems Analysis, Inc. ("VSA"), whereby VSA will
survive and become a wholly owned subsidiary of EAI and the current shareholders
of VSA will become shareholders of EAI, pursuant to the Amended and Restated
Agreement and Plan of Merger dated August 5, 1998 (the "Agreement"). Capitalized
terms not otherwise defined herein shall have the meaning set forth in the
Agreement.
In rendering this opinion, we have relied upon the facts as represented to us in
originals or copies of pertinent documents (sometimes hereinafter referred to
collectively as "Documents"), including:
1. The Statement of Facts and Representations received from Mark E.
Craig.
2. The Statements of Facts and Representations received from the
managements of VSA and EAI.
3. The Amended and Restated Agreement and Plan of Merger, dated
August 5, 1998, by and among VSA and EAI.
4. The August 7, 1998 draft Registration Statement, Form S-4, to be
filed with the Securities and Exchange Commission and containing
the draft Proxy Statement/Prospectus of EAI and VSA.
You have represented to us that the statement of facts contained in the
Documents provide an accurate and complete description of the facts and
circumstances concerning the Merger. We have not been engaged to make and have
not made any independent determination regarding the facts and circumstances
and, therefore, have relied upon the facts and representations in the Documents
with regards thereto for purposes of this letter. Any changes to the facts or
Documents may affect the conclusions stated herein.
<PAGE> 2
This opinion is being rendered solely to EAI, VSA and VSA's shareholders and is
solely for their benefit. This opinion may not be relied upon by any other
person or persons, or be used for any other purposes, including, but not
necessarily limited to, filings with Governmental agencies without our prior
written consent. However, we understand that this opinion may be included as an
exhibit to the Registration Statement, Form S-4, to be filed with the Securities
and Exchange Commission related to the Merger. We consent to such inclusion and
summarization in the Registration Statement of our opinion therein.
STATEMENT OF FACTS
EAI, VSA and Mark E. Craig have represented the following to us:
VSA is a corporation organized and existing under the laws of the State of
Michigan. VSA is a leading company dedicated to dimensional management
consulting, software development, training, and support. As of July 29, 1998 the
authorized capital stock of VSA consisted of 100,000 shares of common stock,
$1.00 par value per share, of which 69,970 shares were issued and outstanding.
Prior to the Merger, VSA will issue 3,498 shares ("Bonus Shares") of its stock
as compensation to certain employees. Therefore, as of the Effective Time,
73,468 shares of VSA stock will be issued and outstanding. Other than the Bonus
Shares and the ESOP (as defined in Section 3.12 of the Agreement), VSA did not
have and was not bound by any outstanding subscriptions, options, convertible
securities, warrants, calls, commitments or agreements of any character calling
for the purchase or issuance of any shares of its capital stock. The stock of
VSA is not publicly traded. As represented by the management of VSA, no other
material changes in such capitalization have occurred between July 29, 1998 and
the date of this opinion.
EAI is a corporation organized and existing under the laws of the State of
Delaware. EAI develops, produces and sells product visualization software and
interactive multimedia products that address the needs of its customers in
domestic and international commercial markets. The presently authorized capital
stock of EAI is 60,000,000 shares of common stock, $0.01 par value per share, of
which, 10,409,395 shares were issued and outstanding as of July 30, 1998, and
20,000,000 shares of preferred stock, $0.01 par value per share, none of which
was issued or outstanding. No shares of EAI stock are held in treasury and no
shares of EAI stock are reserved for issuance. The holders of EAI Common Stock
are entitled to one vote for each share held of record on all matters voted upon
by stockholders. As of July 30, 1998, there were 642 holders of record of EAI
Common Stock. EAI is publicly traded and listed on the National Association of
Securities Dealers Automated Quotations (the "NASDAQ") Stock Exchange. As
represented by the management of EAI, no material changes in such capitalization
have occurred between July 30, 1998 and the date of this opinion.
EAI Victory, Inc. ("Sub") is a Michigan corporation which was organized solely
for the purpose of merging with and into VSA in accordance with the Agreement.
Sub is a wholly owned, first tier subsidiary of EAI. Sub has engaged in no
business activities other than the matters incident to its organization and
matters incident to the Agreement. On the effective date of the merger
("Effective Time"), all of the outstanding capital stock of Sub will be owned,
directly by EAI. At the Effective Time, Sub's assets will consist solely of cash
exchanged for such stock. Upon completion of the Merger, the separate existence
of Sub will cease.
<PAGE> 3
BUSINESS PURPOSE
As represented in the August 7, 1998 draft Registration Statement, Form S-4, EAI
is attempting to consummate the Merger to further implement its growth strategy
to provide customers with comprehensive integrated enterprise solutions through
a unique synergy in technology, products, and markets. EAI and VSA expect to
offer software products that provide VSA's 3D tolerance analysis and
comprehensive assembly circulation technology imbedded in EAI's viewing solution
which should enable customers to dynamically reflect manufacturing variation in
the final product assembly, resulting in higher quality and lower costs. In
addition, various other substantial reasons are enumerated in the Proxy
Statement/Prospectus under the caption "The Merger--Reasons for the Merger."
PROPOSED TRANSACTIONS
You have represented that in accordance with the above stated and referenced
business purposes the following transactions have been proposed:
1. After all necessary regulatory and shareholder approvals have been granted,
Sub will merge with and into VSA in accordance with the Michigan Business
Corporation Act (the "MBCA"), with VSA continuing as the surviving
corporation.
2. As a result of the above transaction, the separate existence of Sub shall
cease. The corporate existence of VSA, with all its purposes, powers, and
objects, shall continue unaffected and unimpaired by the Merger and, as the
surviving corporation, it shall be governed by the laws of the State of
Michigan and succeed to all rights, assets, liabilities and obligations of
Sub in accordance with MBCA.
3. At the Effective Time, each issued and outstanding share of Sub Common
Stock shall be converted into one share of common stock, $1.00 par value
per share, of VSA. Following consummation of the Merger, VSA will be a
wholly-owned subsidiary of EAI.
4. Each share of common stock of VSA issued and outstanding immediately prior
to the Effective Time (other than shares held by VSA shareholders who
exercise their statutory dissenters' rights ("Dissenting Shareholders"))
will be converted automatically in the right to receive shares of fully
paid and nonassessable shares of EAI Common Stock. The VSA Common Stock
held by former VSA shareholders will be automatically canceled and retired
and shall cease to exist.
5. No fractional shares of EAI stock will be issued as part of the
reorganization transaction, but in lieu thereof, each holder of VSA stock
who would otherwise be entitled to receive a fraction of a share of EAI
Common Stock will be paid an amount in cash determined by multiplying (i)
the EAI stock value by (ii) the fraction of a share (rounded to six decimal
places when expressed as an Arabic number) of EAI common stock to which
such holder would otherwise be entitled to receive pursuant to Section 2.4
of the Agreement.
REPRESENTATIONS
The following summarizes the representations which have been provided to Ernst &
Young LLP by the respective managements of EAI and VSA and by Mark E. Craig, who
represents that he now and will continue through the Effective Time to own five
percent or more of the VSA Common Stock.
<PAGE> 4
The following representations have been made by the respective managements of
EAI and VSA:
1. The Merger of Sub with and into VSA will qualify as a statutory merger
under the applicable laws of the State of Michigan and the regulations
thereunder.
2. The fair market value of the EAI stock and other consideration received
by each VSA Shareholder will be approximately equal to the fair market
value of the VSA common stock surrendered in the exchange.
3. All of the stock of VSA outstanding immediately prior to the Merger will
be exchanged solely for stock (except for cash issued in exchange for
fractional shares and dissenters, if any) of EAI. Legal counsel for EAI
has advised us that notwithstanding the Agreement, VSA shareholders have
no dissenters' rights under Michigan law. EAI intends that no
consideration be paid or received (directly or indirectly, actually or
constructively) for VSA stock other than EAI common stock. Neither EAI
nor a related person (as defined in Section 1.368-1(e)(3) of the Federal
Income Tax Treasury Regulations (the "Regulations")) has any plan or
intention, in connection with the plan of reorganization, to (i) acquire
a proprietary interest in VSA for consideration other than stock of EAI,
or (ii) redeem stock of EAI issued in exchange for a proprietary interest
in VSA.
4. Neither VSA nor a related person (as defined in Section 1.368-1(e)(3) of
the Regulations determined without regard to Section 1.368-1(e)(3)(i)(A)
of the Regulations) has any plan or intention, prior to and in connection
with the plan of reorganization, to (i) redeem the stock of VSA, (ii)
acquire stock of VSA with consideration other than stock of VSA or EAI,
or (iii) make an extraordinary distribution with respect to the stock of
VSA.
5. Following the transaction, VSA will hold at least 90 percent of the fair
market value of its net assets and at least 70 percent of the fair market
value of its gross assets and at least 90 percent of the fair market
value of Sub's net assets and at least 70 percent of the fair market
value of Sub's gross assets held immediately prior to the transaction.
For purposes of this representation, amounts paid by VSA or Sub to
dissenters, amounts paid by VSA or Sub to shareholders who receive cash
or other property, amounts used by VSA or Sub to pay reorganization
expenses, and all redemptions and distributions (except for regular,
normal dividends) made by VSA will be included as assets of VSA or Sub,
respectively, immediately prior to the transaction.
6. Prior to the transaction, EAI will be in control of Sub within the
meaning of Section 368(c)(1) of the Internal Revenue Code of 1986, as
amended (the "Code") wherein "control" is defined to mean the ownership
of stock possessing at least 80 percent of the total combined voting
power of all classes of stock entitled to vote and at least 80 percent of
the total number of shares of all other classes of stock of the
corporation.
7. Sub was formed solely for the purpose of effecting this transaction and
has not conducted any business since incorporation other than matters
incident to its organization and matters incident to the Plan of Merger.
Sub will have no liabilities assumed by VSA, and will not transfer to VSA
any assets subject to liabilities, in the transaction.
8. VSA has no plan or intention to issue additional shares of its stock and
EAI has no plan or intention to cause VSA to issue additional shares of
its stock that would result in EAI losing control of VSA within the
meaning of Section 368(c) of the Code.
<PAGE> 5
9. EAI has no plan or intention to reacquire any of its stock issued in the
Merger, other than to acquire a nominal amount of shares of common stock
that may be acquired in ordinary business transactions (including, but
not limited to, open market purchases in brokers' transactions). No
attempt will be made in any such acquisitions of EAI stock to identify or
target former VSA shareholders with a purpose to acquire shares held by
them.
10. EAI has no plan or intention to liquidate VSA; to merge VSA with or into
another corporation; to sell or otherwise dispose of the stock of VSA
except for transfers of VSA stock to corporations controlled by EAI; or
to cause VSA to sell or otherwise dispose of any of its assets or of any
of the assets acquired from Sub, except for dispositions made in the
ordinary course of business or transfers of assets to a corporation
controlled by VSA.
11. Following the transaction, VSA will continue its historic business or use
a significant portion of its historic business assets in a business.
12. As provided in Article X, Section 10.1 of the Agreement, all costs and
expenses incurred by VSA and Mark E. Craig in connection with the
Agreement and the Merger shall be paid by VSA. Expenses incurred by Mark
E. Craig which are paid by VSA will not exceed 10% of the total Merger
consideration as provided in Article II, Section 2.2 of the Agreement.
13. There is no intercorporate indebtedness existing between EAI and VSA or
between Sub and VSA that was issued, acquired, or will be settled at a
discount.
14. In the Merger, shares of VSA stock representing control of Target, as
defined in Section 368(c)(1) of the Code, will be exchanged solely for
voting stock of EAI. For purposes of this representation, shares of
Target stock exchanged for cash or other property originating with EAI
will be treated as outstanding VSA stock on the date of the Merger.
15. The payment of cash in lieu of fractional shares of EAI common stock is
solely for the purpose of avoiding the expense and inconvenience to EAI
of issuing fractional shares and does not represent separately bargained
for consideration. The total cash consideration that will be paid in the
transaction to the VSA shareholders instead of issuing fractional shares
of EAI common stock will not exceed one percent of the total
consideration that will be issued in the transaction to the VSA
shareholders in exchange for their shares of VSA commons stock. The
fractional share interests of each VSA shareholder will be aggregated,
and no VSA shareholder will receive cash in an amount equal to or greater
than the value of one full share of EAI common stock.
16. On the effective date of the transaction, VSA will not have outstanding
any warrants, options, convertible securities or any other type of right
(other than certain stock options covered by the VSA stock Option Plans
which will be assumed by EAI) pursuant to which any person could acquire
stock in VSA that, if exercised or converted, would affect EAI's
acquisition or retention of control of VSA within the meaning of Section
368(c) of the Code.
17. EAI does not own, directly or indirectly, nor has it owned during the
past five years, directly or indirectly, any shares of the stock of VSA.
<PAGE> 6
18. The shareholders of VSA (immediately before the proposed transaction)
receiving shares of EAI common stock will not own (immediately before the
proposed transaction) more than fifty percent of the total fair market
value of EAI common stock outstanding.
19. No two parties to the transaction are investment companies as defined in
Section 368(a)(2)(F)(iii) and (iv) of the Code.
20. VSA is not under the jurisdiction of a court in a Title 11 or similar
case within the meaning of Section 368(a)(3)(A) of the Code.
21. None of the compensation received by any shareholder-employee of VSA will
be separate consideration for, or allocable to, any of their shares of
VSA stock; none of the shares of EAI stock received by any
shareholder-employee will be separate consideration for, or allocable to,
any employment agreement; and any compensation paid to any
shareholder-employees will be for services actually rendered and will be
commensurate with amounts paid to third parties bargaining at arm's
length for similar services.
22. On the date of the transaction, the fair market value of the assets of
VSA will exceed the sum of its liabilities, plus the amount of
liabilities, if any, to which the assets are subject.
The following representations have been made by Mark E. Craig, who represents
that he now owns and will continue through the Effective Time to own five
percent or more of the VSA Common Stock:
1. Craig has no plan or intention prior to, or in connection with the plan
of reorganization, to sell or otherwise dispose of any stock of VSA to
VSA or a related person (as defined in Section 1.368-1(e)(3) of the
Regulations determined without regard to Section 1.368-1(e)(3)(i)(A) of
the Regulations). Additionally, Craig has no plan or intention subsequent
to, or in connection with the plan of reorganization, to sell or
otherwise dispose of any stock of EAI received in the plan of
reorganization to EAI or a related person (as defined in Section
1.368-1(e)(3) of the Regulations determined without regard to Section
1.368-1(e)(3)(i)(A) of the Regulations). Immediately after the effective
time, Craig may sell or otherwise dispose of stock of EAI received in
the Merger to third parties which are not related to EAI or persons
related to EAI (as defined in Section 1.368-1(e)(3) of the Regulations
determined without regard to Section 1-368-1(e)(3)(i)(A) of the
Regulations.
2. None of the compensation received by any shareholder employees of VSA
will be separate consideration for, or allocable to, any of their shares
of VSA stock; none of the shares of EAI stock received by any
shareholder-employees in connection with the Merger will be separate
consideration for, or allocable to, any employment agreement; and the
compensation paid to any shareholder-employees will be for services
actually rendered and will be commensurate with amounts paid to third
parties bargaining at arm's length for similar services.
TECHNICAL DISCUSSION
Statutory Requirements
Section 368(a)(1)(A) of the Code provides that the term "reorganization"
includes a statutory merger or consolidation. Such a reorganization can only be
achieved by strict compliance with applicable corporation laws. A statutory
merger occurs wherein one corporation (the surviving corporation) absorbs
another corporation whose corporate existence ceases. It has been represented by
the managements of EAI and VSA that the merger of Sub with and into VSA, wherein
VSA Common Stock is to be
<PAGE> 7
exchanged for EAI Common Stock, is to occur as a statutory merger under the
applicable laws of the state of Michigan and the regulations thereunder.
Section 368(a)(2)(E) of the Code provides that a transaction which otherwise
qualifies under Section 368(a)(1)(A) will not be disqualified by reason of the
fact that stock of a corporation (the "controlling corporation") which before
the merger was in control of the merged corporation, is used in the transaction
if:
(i) After the transaction, the corporation surviving the merger holds
substantially all of its properties and substantially all of the
properties of the merged corporation (other than stock of the
controlling corporation distributed in the transaction); and
(ii) In the transaction, former shareholders of the surviving corporation
exchange, for an amount of voting stock of the controlling
corporation, an amount of stock in the surviving corporation which
constitutes control of such corporation.
For purposes of Section 368(a)(2)(E) of the Code, the term "control" is defined
in Section 368(c) of the Code as ownership of stock representing at least 80
percent of the total combined voting power of all classes of stock entitled to
vote and at least 80 percent of each class of nonvoting stock. Prior to the
Merger of Sub with and into VSA, it has been represented that the management of
EAI that EAI will own all of the issued and outstanding stock of Sub. Subsequent
to the Merger, EAI will be in control of VSA and, therefore, will be the
"controlling corporation" within the meaning of Section 368(a)(2)(E).
Section 1.368-2(j)(3)(iii) of the Regulations provides that for purposes of
Section 368(a)(2)(E)(i) of the Code, the term "substantially all" has the
meaning as under Section 368(a)(1)(C) of the Code. Revenue Procedure 77-37,
1977-2 C.B. 568 (Section 3.01), provides that, for advance ruling purposes, the
"substantially all" requirement of Section 368(a)(2)(E)(i) of the Code is
satisfied if there is a retention of assets representing as least 90 percent of
the fair market value of the net assets and at least 70 percent of the fair
market value of the gross assets held by the surviving corporation immediately
prior to the transfer. (This threshold amount of assets of the merged
corporation must also be transferred to and retained by the surviving
corporation.) Any payments to dissenters and any redemptions and distribution
(except for regular dividend distributions) made by the corporation immediately
preceding the transfer and which are a part of the Plan of Merger will be
considered as assets held by the corporation immediately prior to the transfer.
Additionally, the payment of expenses, if any, by VSA or Sub incurred in
connection with the Merger is taken into consideration in applying the
"substantially all" test. As represented by management in the representation
letters, after the transaction VSA will hold assets representing as least 90
percent of the fair market value of the net assets and 70 percent of the gross
assets of VSA and Sub, and consequently, the "substantially all" requirement
will be met.
Other Requirements
Sections 1.368-1(b) and 1.368-2(g) of the Regulations provide that the following
additional requirements must be met for a transaction to qualify as a
reorganization within the meaning of Section 368 of the Code:
(i) "continuity of interest" must be present,
(ii) "continuity of business enterprise" must exist, and
<PAGE> 8
(iii) the transaction must be undertaken for reasons pertaining to the
continuance of the business of a corporation which is a party to the
transaction.
Continuity of Interest. In general, the continuity of interest test requires the
owners of the reorganized entity to receive and retain a meaningful equity
interest in the surviving entity. See e.g., Pinellas Ice & Cold Storage Co. v.
Comm'r, 287 U.S. 462 (1933); Cortland Specialty Company v. Comm'r, 60 F.2d 937
(2d Cir. 1932), cert. denied, 288 U.S. 599 (1932); Helvering v. Minnesota Tea
Co., 296 U.S. 378 (1935).
The Internal Revenue Service (the "Service") has issued final and
temporary regulations (T.D. 8760 and T.D. 8761) providing rules for satisfying
the continuity of interest requirement. These regulations substantially
liberalize the historic rules, generally providing that continuity of interest
is satisfied if a substantial part of the value of the proprietary interest in
the target corporation is preserved in the reorganization. Generally,
continuity of interest is not preserved to the extent that the acquiring
corporation acquires target stock for consideration other than acquiring
Company stock, or if, in connection with the plan of reorganization, the
acquiring stock is redeemed (or purchased by a related party). Section
1.368-1(e)(1) of the Regulations. In addition, continuity of interest is not
preserved to the extent that, prior to and in connection with the plan of
reorganization, the target (or a related party) acquires the stock with
consideration other than stock of the target, or makes an extraordinary
distribution with respect to the stock. Section 1.368-1T(e)(1) of the
Regulations. Generally, a related party includes any member of the same
affiliated group (without regard to the exceptions in Section 1504(b) of the
Code) as the acquiring corporation, or any other corporation where the purchase
of the acquiring stock by such corporation would result in the purchase being a
redemption under Section 304(a)(2) of the Code. Section 1.368-1(e)(3) of the
Regulations. Sales by the target shareholders of stock of the acquirer received
in the transaction to unrelated third parties occurring before or after a
reorganization are disregarded.
Based upon the facts presented in the August 7, 1998 draft Registration
Statement, the Agreement, and the Statements of Facts and Representations
provided by the managements of EAI and VSA and by certain VSA shareholders, the
Merger will satisfy the continuity of interest requirement. The managements of
EAI and VSA have represented that all of the stock of VSA outstanding
immediately prior to the merger will be exchanged solely for stock of EAI,
except for cash paid for fractional shares. EAI has represented further that
neither EAI nor a related person (as defined in Section 1.368-1(e)(3) of the
Regulations) has any plan or intention, in connection with the plan of
reorganization, to (i) acquire a proprietary interest in VSA for consideration
other than stock of EAI, or (ii) redeem any of the stock issued in the
transaction. In addition, the management of VSA nor a related person (as defined
in Section 1.368-1(e)(3) of the Regulations determined without regard to Section
1.368-1(e)(3)(i)(A) of the Regulations) has any plan or intention, prior to and
in connection with the plan of reorganization, to redeem, acquire, or make an
extraordinary distribution with respect to the stock of either entity.
Continuity of Business Enterprise. Section 1.368-1(b) of the Regulations also
provides that a continuity of business enterprise (as described in Section
1.368-1(d)(2) of the Regulations) is requisite to a tax-free reorganization.
Section 1.368-1(d)(2) of the Regulations provides that continuity of business
enterprise requires that the acquiring business (EAI) either continue the
acquired corporation's historic business or use a significant portion of its
assets in a business. The managements of EAI and VSA have represented that VSA
will continue to be engaged in its historic business or use a significant
portion of its historic business assets and the business assets of Sub in a
business after the Merger.
<PAGE> 9
Business Purpose. Section 1.368-2(g) of the Regulations provides that a
reorganization must be undertaken for reasons germane to the continuance of the
business of a corporation which is a party to the reorganization. As indicated
in the "Business Purpose" section above, the managements of EAI and VSA have
represented that there are substantial business reasons for the Merger which
satisfies the business purpose requirement as set forth in the regulations.
Based upon these representations, the Merger satisfies the business purpose
requirement as set forth in the Regulations.
Additional Statutory and Regulatory Provisions
Section 368(b) of the Code defines the term "a party to a reorganization" to
include a corporation resulting from a reorganization, and both corporations, in
the case of a reorganization resulting from the acquisition by one corporation
of stock or properties of another.
Section 361(a) of the Code provides that a corporation that is a party to a
reorganization does not recognize gain or loss when, as part of the
reorganization, it exchanges property solely for stock and securities of another
corporation that is also a party to a reorganization.
Section 1032(a) of the Code generally provides that no gain or loss shall be
recognized to a corporation on the receipt of money or other property in
exchange for stock (including treasury stock) of such corporation. Revenue
Ruling 57-278, 1957-1 C.B. 124, provides that a subsidiary will not recognize
gain upon the exchange of its parent's stock for property in connection with a
tax-free reorganization. See also Section 1.1032-2 of the Regulations.
Section 354(a)(1) of the Code provides that shareholders and security holders do
not recognize gain or loss when they exchange stock or securities of a
corporation that is a party to a reorganization solely for stock and securities
of that corporation, or of another corporation that is a party to the
reorganization.
Section 362(b) of the Code generally provides that if property is acquired by a
corporation in connection with a reorganization, then the basis shall be the
same as it would be in the hands of the transferor, increased by the amount of
any gain recognized to the transferor on such transfer.
Section 358(a)(1) of the Code generally provides that in the case of an exchange
to which Section 351 or Section 354 applies, the basis of the property permitted
to be received without the recognition of gain or loss shall be the same as that
of the property exchanged.
Section 1223(1) of the Code states that in determining the period for which a
taxpayer has held property received in an exchange, the period for which the
taxpayer held the property exchanged shall be included if the property has, for
the purpose of determining gain or loss from a sale or exchange, the same basis
in whole or in part in the taxpayer's hands as the property exchanged, and the
property exchanged constitutes a capital asset at the time of the exchange.
Section 1223(2) of the Code provides that in determining a taxpayer's holding
period for property, there shall be included the period for which such property
was held by another person, if such property has, for the purpose of determining
gain or loss from a sale or exchange, the same basis in whole or in part in such
taxpayer's hands as it would have had in the hands of such other person.
Section 1.1502-76(d)(3) of the Regulations provides that if the shareholders of
an acquired common parent end up owning as a result of an acquisition more than
50 percent in value of the acquiring corporation's stock, then a reverse
acquisition is deemed to occur. If a reverse acquisition occurs, the
<PAGE> 10
consolidated group of the acquiring common parent terminates rather than the
consolidated group of the acquired common parent. The shareholders of VSA will
not own more than 50 percent of the value of EAI after the Merger. Consequently,
a reverse acquisition will not occur.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
Based solely upon the facts and representations set forth in the Documents, the
applicable provisions of the Code, the Regulations, and rulings thereunder, it
is our opinion that the following federal income tax consequences will result
from the Merger:
(1) Provided that the Merger of Sub into VSA qualifies as a statutory
merger under the applicable state law, and that VSA will hold
substantially all of its assets and substantially all of the assets
of Sub, and in the transaction the VSA shareholders will exchange an
amount of stock constituting control of VSA (within the meaning of
Section 368(c) of the Code) solely for EAI voting common stock, the
Merger will constitute a "reorganization" within the meaning of
Section 368(a)(1)(A) of the Code. The reorganization will not be
disqualified solely by reason of the fact that the voting stock of
EAI is used in the transaction (Section 368(a)(2)(E) of the Code).
For purposes of this holding, "substantially all" means at least 90
percent of the fair market value of the net assets and at least 70
percent of the fair market value of the gross assets of each VSA and
Sub immediately prior to the Merger. VSA, Sub, and EAI will each be a
"party to a reorganization" within the meaning of Section 368(b) of
the Code.
(2) No gain or loss will be recognized to VSA upon the receipt of the
assets of Sub in exchange for shares of VSA Common Stock (Section
1032(a) of the Code).
(3) No gain or loss will be recognized to Sub on the transfer of its
assets to VSA (Section 361(a) of the Code).
(4) No gain or loss will be recognized to EAI upon the receipt of VSA
common stock in exchange for stock of Sub (Section 354(a)(1) of the
Code).
(5) No gain or loss will be recognized to the shareholders of VSA upon
the exchange of VSA common stock solely for EAI common stock (Section
354(a)(1) of the Code).
(6) The payment of cash in lieu of fractional share interests of EAI
Common Stock will be treated as if the fractional shares were
distributed as part of the exchange and then were redeemed by EAI.
These cash payments will be treated as distributions in full payment
in exchange for the stock redeemed, subject to the provisions and
limitations of Section 302(a) of the Code (Rev. Rul. 66-365, 1966-2
C.B. 116 and Rev. Proc. 77-41, 1977-2 C.B. 574).
(7) The tax basis of the shares of EAI Common Stock received by a
stockholder of VSA will be the same as the tax basis of the shares of
VSA Common Stock exchanged therefor, decreased by the amount of any
tax basis allocable to any fractional share interest for which cash
is received (Section 358(a)(1) of the Code).
(8) The holding period of the EAI Common Stock received by the VSA
shareholders will include the period during which the VSA Common
Stock surrendered in exchange therefor was held,
<PAGE> 11
provided that the VSA Common Stock so surrendered is held as a
capital asset, within the meaning of Section 1221 of the Code, at the
Effective Time (Section 1223(l) of the Code).
SCOPE OF OPINION
The scope of this opinion is expressly limited to the federal income tax issues
specifically addressed in (1) through (8) in the section entitled "CERTAIN
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES", above. Specifically, our opinion
has not been requested, and we have made no determination nor expressed any
opinion on any other issues, including, but not limited to, valuation issues,
any state and local, foreign, consolidated return, employee benefit, and Section
382 issues, or alternative minimum tax consequences to the parties to this
transaction. Additionally, our opinion has not been requested and none is
expressed with respect to the exercise of options or similar rights to purchase
stock, or the exchange, assumption or substitution of options or similar rights
to purchase the VSA Common Stock for rights to purchase EAI Common Stock.
Further, no opinion is expressed as to the qualification of the Merger as a
statutory merger under state law.
Our opinion, as stated above, is based upon our analysis of the Internal Revenue
Code of 1986, as amended, the Treasury Regulations, current case law, and
published Internal Revenue Service authorities in effect as of the date of this
letter. The foregoing are subject to change, and such change may be
retroactively effective. No assurance can be provided as to the effect of any
such change upon our opinion. In addition, our opinion is based on the facts and
representations contained in the Documents. Any change in the Documents may
affect our opinion, perhaps in an adverse manner. We have undertaken no
obligation to, and will not, update this opinion for changes in facts or law
occurring subsequent to the date hereof.
This letter represents our views as to the interpretation of existing law and is
not binding on the Internal Revenue Service or the courts.
Very truly yours,
/s/ ERNST & YOUNG LLP
<PAGE> 1
EXHIBIT 23(A)
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to or firm under the caption "Experts" in the
Registration Statement (Form S-4) and related Prospectus of Engineering
Animation, Inc. and to the incorporation by reference therein of our report
dated January 30, 1998, with respect to the consolidated financial statements of
Engineering Animation, Inc. included in its Annual Report (Form 10-K) for the
year ended December 31, 1997, filed with the Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
Minneapolis, Minnesota
August 12, 1998
<PAGE> 1
EXHIBIT 23(B)
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated August 6, 1998, with respect to the consolidated
financial statements of Variation Systems Analysis, Inc. included in the
Registration Statement (Form S-4) and related Prospectus of Engineering
Animation, Inc., filed with the Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
Minneapolis, Minnesota
August 13, 1998
<PAGE> 1
EXHIBIT 23(C)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Form S-4 Registration Statement and related Prospectus
pertaining to Engineering Animation, Inc., of our report on Technology Company
Ventures, L.L.C. dated October 14, 1997 included in the Engineering Animation,
Inc. Annual Report on Form 10-K for the year ended December 31, 1997 and to all
references to our firm included in this Registration Statement and related
Prospectus.
/s/ ARTHUR ANDERSEN LLP
Portland, Oregon
August 12, 1998
<PAGE> 1
EXHIBIT 23(D)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Registration Statement on Form S-4 of Engineering
Animation, Inc. (the "Company") of our report dated April 20, 1998 relating to
the consolidated financial statements of Sense8 Corporation, which appears in
the Current Report on Form 8-K/A of the Company dated July 17, 1998.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
San Jose, California
August 12, 1998
